The Thor Corporation has estimating the following cash flows for a bidding project that requires the delivery of 20,000 units per year of special plastic hinges for a five-year period. To supply the products, the company will incur an initial investment of $880,000 to purchase an equipment that will last five years. Net working capital of $50,000 will be required in year 0 and none thereafter. The variable cost associated with producing each hinge is $20. The fixed cost per year is estimated $200,000. The equipment can be sold in five years for $100,000. The company uses a 15% cost of capital for accepting projects and the marginal tax rate is 35%.

a. After some analysis, they find out that their competition usually bid at a price of $40. They would like to beat this price by quoting $38 per piece. What should the salvage value be for the new equipment in year 5, in order for them to be able to quote $38 per piece.

b. What are flotation costs? Explain how the presence of flotation costs can impact the above answers. A nonnumerical answer is sufficient.