Question
VR Ltd. has been approached to bid on a contract to sell 10,000 voice recognition (VR) computer keyboards a year for four years. Due to
VR Ltd. has been approached to bid on a contract to sell 10,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated, and no sales will be possible.
The equipment necessary for the production will cost 2.8 million and will be depreciated on a straight-line basis over the useful life. Production will require an investment in net working capital of 75,000, and the equipment can be sold for 200,000 at the end of the project. Fixed costs are 500,000 per year, and variable costs are 175 per unit.
In addition to the contract, you feel your company can sell 3,000, 6,000, 8,000, and 5,000 additional units to companies in other countries over the next four years, respectively, at a price of 275. This price is fixed.
The managing director of the company will undertake the project only if it has an NPV of 100,000. The tax rate is 28 %, and the required return is 12 %. What bid price should you set for the contract?
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