Question
Lawrence Production Company is bidding a 10-year contract to provide the customer with 4,000 units of product per year. Their accounting department has estimated a
Lawrence Production Company is bidding a 10-year contract to provide the customer with 4,000 units of product per year. Their accounting department has estimated a labor and material costs of $30 per unit. An initial capital investment of $1,000,000 is required. The equipment belongs to CCA class 43 (rate 30%). Initial net working capital of $50,000 is also needed. The firm must pay factory lease expenses of $50,000 per year. Equipment maintenance expenses are projected to be $30,000 per year. Both lease expenses and maintenance expenses are payable at the end of the year. At the end of the contract, the capital equipment can be sold for $20,000. The firm has a tax rate of 40% and a required return rate of 15%.
DO: DETERMINE THE TAX BEFORE UNIT PRICE ofLawrence should bid for this contract. Round the unit price to the nearest dollar. Show all calculations and formulas using EXCEL.
!! I have the steps here on how to do it, I just don't know how to do it:
Step 1 - list out all the costs by year
Step 2 - calculate the total after-tax cost by year
Step 3 - include initial investment, salvage value, NWC, etc. cash flows
Step 3 - add up all the cash flows year by year
Step 4 - calculate the NPV of the cash flow of all years
Step 5 - use the PV CCA tax shield formula to calculate the tax shield amount using the photo attached for formula:
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