You are working for the CFO of Yemek Catering Inc. The CFO is considering whether to bid for a contract to supply lunch meals to a large construction company, named naat Inc. You received a memo from your boss, the CFO, to analyze and review the bid before it is submitted. The sales department of Yemek Catering worked with the production department to prepare the bid and supporting documents.

The bid requires Yemek Catering to provide 25,200 lunch meals per year for the next 5 years. The proposed selling price in the first year is 40 TL per meal and is expected to increase in line with inflation. Yemek Catering has negotiated a 30% increase in selling price with the manufacturing company to compensate for inflation. The expenses of providing the dining services total 636,000 TL in the first year, including 300,000 TL of fixed costs and variable costs of 336,000 TL (one third of sales). Fixed costs are also expected to increase with inflation.

Yemek Catering needs to invest in additional equipment worth 100,000 TL to provide catering services to the manufacturing firm in the next five years. The investment in equipment would be depreciated for tax purposes straight line over 5 years to zero. However, Yemek Catering believes it can sell the second-hand equipment for 5,000 TL (assume the sale of equipment takes place at the end of year 5).

Yemek Catering also forecasts that to provide the lunch service it would need to invest in working capital. Working capital would average 10 percent of current years sales.

1) What is your recommendation regarding the bid to your CFO? Should Yemek Catering bid for the contract if the discount rate for the project is 35 percent and the tax rate is 20 percent?

2) What is the accounting break-even revenue (in the first year)?

3) What is the financial break-even revenue (in the first year)?