Q1: Tucker is becoming more confident with the numbers in the proposal, but is uneasy about the short-term nature of the contract. He is wondering if it might be advantageous to try and renegotiate the contract in an exchange for a longer commitment for the client. His discussion with you included a fixed price for 5 years followed by a reasonable growth period. He is hoping that some incentive will be enough to get a 5-year commitment. Calculate a new NPV and IRR given your suggested price. You must also include the impact to the customer by calculating the cost of the contract before and after making price changes. Should Hansson accept this, and would you accept this if you were the customer?

Answer:

48000 52000 56000 60000 64000 68000 68000 68000 68000 68000 Unit Costs 0.95 0.96 0.97 0.99 1.01 1.02 1.03 Selling Price 1.77 1.81 1.84 1.88 1.92 1.99 2.03 2.07 2. 12 New Project 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Exhibit 5 Exhibit 5 Revenue $ 84,960.00 $ 94,120.00 $ 103,040.00 $ Cost to Expar 57.817.0 Production Expenses Interest Exp 7.75% 1% Raw Materials 45,120.00 $ 49,400.00 $ 53,760.00 $ 58.200.00 $ 62.720.00 $ 67.320.00 $ 68,000.00 $ 68,680.00 $ 69.360.00 $ 70,040.00 3.00% Manufacturing Overhead 3,600.00 3,708.00 3.819.24 3,933.82 4,051.83 4.173.39 4.298.59 4.427.55 4.560.37 4,697.18 Depreciation 4,000 3% Maintenance Expense 2.387.03 2.458.64 2,532.39 2,608.37 2,686.62 2,767.22 2,850.23 2.935.74 Tax Rate 40% Exhibit 5 Labor Expense $ 20,233.30 $ 22.842.40 $ 25,254.60 $ 28.174.80 $ $ 31,969.60 $ 33,088.50 $ 34.246.60 $ 35,445.20 7.80% Selling General and Admir $ 6,626.88 $ 7.341.36 $ 9.584.64 $ 10,342.80 $ 10,554.96 $ 10,767.12 $ 10,979.28 $ 11,244.48 NPV Discour 7.75% Total Operating Expense 76.236.88 $ 83,000.16 10,845.79 $ 98,645.45 $ 107 063.67 115,333.05 17.509.77 $ 119,730.38 121,996.48 $ 124,362.60 EBITDA 8,723.12 $ 11,119.84 12.194.22 $ 14.154.55 15,816.33 $ 17.266.95 $ 17 810.23 $ 18,309.62 $ 18.763.52 $ 19,797.40 18 Flat Depreciation $ 4,000.00 4,000.00 $ 4,000.00 4,000.00 $ 4,000.00 19 EBIT 4,723.12 $ 7.119.84 8.194.22 $ 10, 154.55 11,816.33 13.266.95 $ 13,810.23 $ 14.309.62 $ 15,797.40 20 21 Flat Interest Expense $ 4,480.82 $ 4,480.82 $ 4,480.82 4,480.82 4,480.82 $ 4,480.82 242.30 2,639.02 3,713.40 $ 5,673.73 $ 7 335.51 $ 8,786.13 $ 9,329.41 $ 10,282.70 11,316.58 Calc Taxes 96.92 $ $ 2.934.21 $ 3,514.45 $ 3.731.77 $ 3,931.52 4.113.08 $ 4,526.63 Net Profit 145.38 .583.41 $ 2.228.04 3,404.24 4.401.31 $ 5,271.68 5,597.65 $ 5,897.28 6.169.62 6,789.95 Flat Add Depreciation 4,000.00 $ 4,000.00 4,000.00 $ 4,000.00 $ 4,000.00 $ $ Total Cast -57 817.0 $ 4.145.38 $ 5,583.41 8,401.31 $ 9.271.68 $ 9,597.65 $ $ 10.169.62 $ 10,789.95 Cost of 10 year contract to customer NP Base Scenario IRR 5 YR fixed Pricing Q1: Tucker is becoming more confident with the numbers in the proposal, but is uneasy about the short-term nature of the contract. He is wondering if it might be advantageous to try and renegotiate the contract in an exchange for a longer commitment for the client. His discussion with you included a fixed price for 5 years followed by a reasonable growth period. He is hoping that some incentive will be enough to get a 5-year commitment. Complete your calculations under the Q.1 36 tab. You must calculate the new NPV and IRR given your suggested price. You must also include the impact to the customer by calculating the cost of the contract before and after making price changes. Should Hansson accept this, and would you accept this if you were the customer? 38