CASH FLOW ESTIMATION Mojo Jojo, CFO of NANO Inc. opened the company confidential envelope. It contained a draft competitive bid for a contract to supply duffel canvas to navy. The cover memo from NANOs CEO, asked Mr Jojo to review the bid before it was submitted. The bids and its supporting documents had been prepared by NANO sales staff. It called for NANO to supply 100,000 yards of duffel canvas per year for 5 years. The proposed selling price was fixed at $30 per yard. Mr. Jojo was not usually involved in sales, but this bid was unusual in at least two respects. First, if accepted by the Navy, it would commit NANO to a fixed price, long term contract. Second, producing the duffel canvas would require an investment of $1.5 million to purchase machinery and to refurbish NANOs plant in Lumut, Perak. Mr. Jojo set to work and by the end of the week had collected the following facts and assumptions: The plant in Lumut had been built in the early 1990s and is now idle. The plant was fully depreciated on NANOs book, except for the purchase cost of land (in 2000) of $10,000. The land can be sold for $600,000 after 5 years. Refurbishing the plant would cost $500,000. This investment would be depreciated for tax purposes on the 10-year MACRS schedule. The rates are 10%, 18%, 14.4%, 11.52%, 9.22%, 7.37%, 6.55%, 6.55%, 6.55%, 6.55% and 3.29% The new machinery would cost $1 million. The investment could be depreciated on the 5-year MACRS schedule. The rates are 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%. The refurbished plant and new machinery would last for many years. However, the remaining market for duffel canvas was small and it was not clear that additional orders could be obtained once the Navy contract was finished. The machinery was custom built and could be used only for duffel canvas. Its second hand value at the end of 5 years is probably zero. Cost of goods sold includes fixed cost of $300,000 per year plus variable costs $18 per yard. Costs are expected to increase at the inflation rate of 4 percent per year. The initial investment in working capital is equal to $300,000 and it is assume fully recovered at the end of the project. Armed with his information, Mr. Jojo constructed a spreadsheet to calculate the NPV of duffel canvas project, assuming that NANOs bid would be accepted by Navy. He had just finished debugging the spreadsheet when another confidential envelope arrived from NANOs CEO. It contained a firm offer from a Tanjung Malim real estate developer to purchase NANOs Lumut land and plant for $1.5 million. Should Mr. Jojo recommend submitting the bid to the Navy at the proposed price of $30 per yard? The discount rate for this project is 12 percent and 35 percent tax rate is applicable to the NANO Inc?