Here's another problem from an older edition of the book. This is

an example of finding out what price to set our product price each

year in order to recoup our investment and achieve a target

return. Make sure you follow the same steps and logic as you did

in the previous example. Remember to deduct depreciation to

determine taxes and then remember to add it back. Also,

remember to include the initial working capital as an investment

up front and then to "recoup" it as cash at the end of the project.

Finally, remember to tax the salvage value appropriately in year

five; this should be relatively straightforward given the equipment

is fully depreciated. $($Note that this problem asks you to

depreciate the equipment to zero instead of down to the expected

salvage value; this is a different approach than we covered in class

and that you likely learned in your Financial Accounting class$).$

Hint: draw a timeline and drop in all the information you know as

well as what you are trying to determine. Once you do$,$ you'll

realize you need to determine an annual after$-$tax cash flow that

generates the appropriate return $($Step $1).$ After you calculate the

required annual after$-$tax cash flow in Step $1,$ you can write out

the formula for each year's after$-$tax cash flow $($including price per

carton$),$ make this equal to the annual cash flow calculated in Step

$1$ and solve for price per carton $($this is Step $2).$

Calculating a Bid Price Another utilization of cash flow analysis is setting the bid

price on a project. To calculate the bid price, we set the project NPV equal to zero

and find the required price. Thus the bid price represents a financial break$-$even level

for the project. Guthrie Enterprises needs someone to supply it with $140,000$ cartons

of machine screws per year to support its manufacturing needs over the next five

years, and you've decided to bid on the contract. It will cost you $$1,800,000$ to install

the equipment necessary to start production; you'll depreciate this cost straight$-$line

to zero over the project's life. You estimate that in five years this equipment can be

salvaged for $$150,000.$ Your fixed production costs will be $$265,000$ per year, and

your variable production costs should be $$8\mathrm{.}50$ per carton. You also need an initial

investment in net working capital of $$130,000.$ If your tax rate is $35$ percent and you

require a $14$ percent return on your investment, what bid price should you submit?