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MGM Co. has been approached to bid on a contract to sell 5,000 voice recognition (VR)...

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Finance

MGM Co. has been approached to bid on a contract to sell 5,000voice recognition (VR) computer keyboards per year for four years.Due to technological improvements, beyond that time they will beoutdated and no sales will be possible. The equipment necessary forthe production will cost $3 million and will be depreciated on astraight-line basis to a zero salvage value. Production willrequire an investment in a net working capital of $395,000 to bereturned at the end of the project, and the equipment can be soldfor $305,000 at the end of production. Fixed costs are $570,000 peryear, and variable costs are $75 per unit. In addition to thecontract, you feel your company can sell 11,400, 13,500 17,900, and10,400 additional units to companies in other countries over thenext four years, respectively, at a price of $180. This price isfixed. The tax rate is 21 percent, and the required return is 12percent. Additionally, the president of the company will undertakethe project only if it has an NPV of $120,000. What bid priceshould you set for the contract? (Can NOT use Excel)

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4.2 Ratings (511 Votes)
STEP1Calculation of Initial cash flow Cost of equipment 3000000 Net working capital 395000 Total 3395000 STEP2 Calculation of cash inflow in each year due to other operationsSelling of additional units at a price of 180 Tax Rate 21021 A B CAB D75A E FCDE G1021F Sale in Price per Sales in Variable Fixed cost Before tax After Tax Year Units unit dollars cost Profit Profit 1 11400 180 2052000 855000 570000 627000 495330 2 13500    See Answer
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