Schneider's, Inc. George Schneider, the CFO of Schneider's, Inc. is currently reviewing a proposal from the city municipality to provide 20,000 galvanize-coated trash-cans per year for the next 7 years. Schneider's Inc. has been manufacturing galvanize-coated pails, pans, water sprinklers, flower pots & vases, and various sizes of trash-cans for home and garden use for the last 25 years. Trash cans manufactured by the existing production facilities would not meet the maximum strength and weight capacity required by city. After a conversation with the chief engineer, Jinhu Xu, they identified two production processes. The first process, being more automated, requires $1,330,000 investment in the production equipment. It has a life of seven years and an expected market value of zero at the end of its useful life. In this process, raw materials are expected to cost $7.50 per unit ($150,000 per year), a figure somewhat lower than the second production process due to the automated machine's ability to provide the desired strength with a slightly thinner metal-sheet. Direct labor expense is $1 per unit, or $20,000 per year. General overhead, including a maintenance agreement on this rather complex piece of equipment, is $140,000 per year. The other production method requires equipment that costs $800,000 and has a life of four years. At that time, the market value is zero and the machine would have to be replaced, probably at the same original price, to continue production. The machinery was custom built and could be used only for durable trash-can production; therefore, its second-hand value would be no more than $30,000 if Schneider's Inc. were to sell the machine one year before the end of its useful life. With this machine, thicker metal sheets are needed to provide the desired strength to trash-cans, so the raw material cost would be $9.50 per unit or $190,000 per year. Similarly, more hand labor would be involved, so direct labor cost would be $3 per unit, or $60,000 per year. The machinery is not as complex as the other one, so maintenance and general overhead would be only $100,000 per year. Both production processes require about 40,000 square feet of floor space, which can be leased for $700,000 per year, and both are considered to be similar in risk to the overall firm. The company uses straight line depreciation method and is subject to a 40 percent tax rate. Assuming a 12% weighted average cost of capital: 1. Which production process should George Schneider select? Hint: To answer this question you could ignore the annual sales figures (since the quantity to be delivered will be the same in both production processes) but recognize all the other relevant components of Initial , Intermediate, and Terminal Cash flows in your calculations. You could then make a comparison based on their PV s (what you are essentially computing is the PV of all costs since you are ignoring the sales). The one with the lower PV of all costs is the one that will allow you to set a lower bid price. 2. At what price per trash-can should he submit a bid to the city? Based on your decision in part 1, calculate the lowest possible price that will let Schneider's Inc. financially break-even in this project