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Unformatted text preview: FNCE 3010 (Durham). Fall 2007. Quiz 7. 1. Davis Office Products (DOP) is considering making a bid to supply staplers to the University of Colorado. The contract is for 5000 staplers per year over the next five years. It will cost $45,000 to install the equipment neeeded to start production. The salvage value for this equipment is expected to be $8,000. The equipment will be depreciated using the straight-line approach over 7 years. Production costs will be $39,500 per year. Also, an initial investment of $11,000 in net working capital will be needed (which will be recovered at the end of the project). The tax rate is 34% and DOPs cost of capital for this project is 14%. (a) If DOP receives $55,000 per year for delivering the staplers, what is the projects NPV? What is its IRR? Should they undertake this project? (b) What is the minimum bid price (per year) they should submit? Solution: (a) DEPR = 45000/7 = 6429 OCF = (Sales - Costs)*(1-T) + Depr*T = (55000 - 39500)*.66 + 6429*.34= (55000 - 39500)*....
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- Fall '07
- Corporate Finance