Sharma & Anil Railcar Limited is considering bidding on a contract to supply 10 subway cars each year to the City of Montreal for the next 15 years. Question: Use the following information to determine the bid price per subway car.

1. To build these cars the company has to upgrade the existing plant and equipment. Existing P& E has

   a current market value of $5,000,000 and an expected salvage value of $1,000,000 after 10 years.

   Upgrade will cost $10,000,000 and after 15 years P & E could be salvaged for $2,000,000.

2. If the company decided to build the subway cars then it will lose $1,200,000 per year of after tax

   operating income over a 10 year period from the current operations.

3. Labour and material cost is estimated to be $400,000 per subway car and the fixed cost $3,000,000 per

   year.

4. Subway car project will require an addition to net working capital of $3,000,000, which will be fully

   recovered after 15 years.

5. CCA rate is 25%, tax rate is 40% and the appropriate discount rate is 12%.