Question
United Technology needs someone to supply it with 100,000 units of a part per year to support its manufacturing needs over the next 3 years,
United Technology needs someone to supply it with 100,000 units of a part per year to support its manufacturing needs over the next 3 years, and you have decided to bid on the contract. It will cost you $1.5 million to install the equipment necessary to start production. The equipment cost will be depreciated over straight-line to zero over the projects life. In three years, the equipment can be sold for $400,000. Fixed production costs will be $700,000 per year. Variable production costs will be $8 per unit. An initial investment in net working capital of $200,000 will be required. If your tax rate is 25% and you require a 10% return on your investment what is the lowest price you should bid per unit of this part?
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