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You have been assigned to respond to an RFP on a contract to supply 20,000 units of a product per year to a U.S company
You have been assigned to respond to an RFP on a contract to supply 20,000 units of a product per year to a U.S company for a period of four (4) years. The necessary capital investment in plant and equipment is $5.0 million, which will be depreciated for tax purposes using the five-year MACRS asset class depreciation schedule. The plant and equipment are expected to have a $500,000 residual value at the completion of the contract. The costs associated with the production of the 20,000 units per annum are as follows: Variable costs: Direct labor: $1.0 million p.a. Materials: $2.0 million p.a. Direct power and light: $1.0 million p.a. Fixed costs: Occupancy, insurance and other overheads: $600,000 p.a. If your firm makes this capital investment, it will have sufficient excess capacity to make and sell additional units of the product, over and above the 20,000 units per year under the contract, for export to European customers, at a price of $250 each, over the four years of the project, as follows: Year 1: 3,000 units; Year 2: 6,000 units; Year 3: 8,000 units; Year 4: 5,000 units. Again, these sales would be in addition to the 20,000 units per year supplied under the contract, taking advantage of the excess capacity afforded by the $5.0 million capital investment. Currently, the firm's working capital investment is about $3.00 per one unit of sales per year. Following the normal convention, the we assume that this investment is made at the end of the year in which the sales take place. The firm's tax rate is 25%. The funding cost is 13%. The minimum acceptable NPV is a positive $100,000. Required: Present to management your computation of the bid price. You have been assigned to respond to an RFP on a contract to supply 20,000 units of a product per year to a U.S company for a period of four (4) years. The necessary capital investment in plant and equipment is $5.0 million, which will be depreciated for tax purposes using the five-year MACRS asset class depreciation schedule. The plant and equipment are expected to have a $500,000 residual value at the completion of the contract. The costs associated with the production of the 20,000 units per annum are as follows: Variable costs: Direct labor: $1.0 million p.a. Materials: $2.0 million p.a. Direct power and light: $1.0 million p.a. Fixed costs: Occupancy, insurance and other overheads: $600,000 p.a. If your firm makes this capital investment, it will have sufficient excess capacity to make and sell additional units of the product, over and above the 20,000 units per year under the contract, for export to European customers, at a price of $250 each, over the four years of the project, as follows: Year 1: 3,000 units; Year 2: 6,000 units; Year 3: 8,000 units; Year 4: 5,000 units. Again, these sales would be in addition to the 20,000 units per year supplied under the contract, taking advantage of the excess capacity afforded by the $5.0 million capital investment. Currently, the firm's working capital investment is about $3.00 per one unit of sales per year. Following the normal convention, the we assume that this investment is made at the end of the year in which the sales take place. The firm's tax rate is 25%. The funding cost is 13%. The minimum acceptable NPV is a positive $100,000. Required: Present to management your computation of the bid price
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