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Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle

Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would give you $912,000 after taxes. Three years ago, you purchased some equipment for $60,000. This equipment has a current book value of $40,000 and a current market value of $30,000. The land and equipment can be used for this project. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the projects 5-year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.5 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit? Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would give you $912,000 after taxes. Three years ago, you purchased some equipment for $60,000. This equipment has a current book value of $40,000 and a current market value of $30,000. The land and equipment can be used for this project. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the projects 5-year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.5 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit?

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