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Overdraft Example: The contractor XYZ decided to prepare a bid for a project. The bidding team estimates that the project will last for 5 months,
Overdraft Example: The contractor XYZ decided to prepare a bid for a project. The bidding team estimates that the project will last for 5 months, with the expenditure (cost) dynamics shown below. The owner's contracting policy specifies that the payment to the contractor will be done only when the project if fully completed. In other words, the contractor will receive no mobilization (up front) payment, nor monthly progress payments; only the final lump-sum payment. Suppose that all expenditures are made at the end of the month. If the contractor uses overdraft services, it will have to pay to the bank a 15% interest per year and a $5,000 fee for each month they use it. Assume that the bank does not pay any interest to the contractor when the account is positive. The current account balance of the contractor is $60,000. What is the minimum amount the contractor XYZ should bid in order to breakeven? Months 0 1 2 3 4 5 Receipts ? Expenditures $50,000 $250,000 $350,000 $350,000 $150,000 $50,000
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