Mark Twain, CFO of CanvasCorp, just received an envelope from CanvasCorps CEO. In this envelope the CEO is asking to review a draft for a competitive bid for a contract to supply duffel bags to the U.S. Navy.

The bid requires CanvasCorp to supply 100,000 duffel bags per year for 5 years. The proposed selling price is fixed at $30 per duffel bag.

The bid is unusual for two different reasons:

If accepted, the contract will impose on CanvasCorp a fixed price.

Producing duffel bags means investing $1.5 million to purchase machinery and to refurbish CanvasCorp plant in Chicago.

Mark Twain has collected the following facts:

The plant in Chicago has been built in the early 1900s and is now idle. The plant was fully depreciated on CanvasCorps books, except for the purchase cost of the land of $10,000.

The land is in a wonderful position. Close to the financial district. Mark Twain thinks the land and the idle plant could be sold, immediately or in the future, for $600,000.

Refurbishing the plant would cost $500,000 (this is part of the initial investment of $1.5 million). This investment would be depreciated for tax purposes on the 10-year MACRS schedule. Information on the MACRS schedule is reported at page 6.

The new machinery would cost $1 million (this is part of the initial investment of $1.5 million). This investment could be depreciated on the 5-year MACRS schedule. Information on the MACRS schedule is reported at page 6.

The refurbished plant and new machinery would last for many years. However, the market for duffel bags is limited and is not clear that additional orders could be obtained after the Navy contract is finished. The machinery is custom-built and, consequently, can only be used for the duffel bags business. The secondhand market value at the end of 5 years is zero.

Table 1 (page 6) shows the sale forecasts for the U.S. Navy duffel bags project.

Mark Twain thinks that the investment in net working capital would average about 10% of sales.

Armed with this information, Mark Twain constructed a spreadsheet to calculate the NPV of the duffel bags project.

He had just finished debugging the spreadsheet when another envelope arrived from CanvasCorps CEO. It contained a firm offer from a Michigan real estate developer to purchase CanvasCorp land and plant for $1.5 million in cash. The sale is subject to taxation (35% as reported in Table 1).

Should Mark Twain recommend submitting the bid to the U.S. Navy at the proposed price of $30?

Should Mark Twain recommend accepting the offer from the Michigan real estate developer?

Provide you answers (with calculations) assuming that the discount rate for this project is 12%.