18 FSDNPT (HW)

# 18 FSDNPT (HW) - We can solve for the necessary OCF that...

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Suk Stooby U Corporation needs 10,000 rivets per year for the next three years to fill its aerospace contract with the U.S. government. You decide to bid on the project. Initial asset costs are estimated at \$50,000 and the equipment can be depreciated straight line over 3 years to zero. The predicted salvage value is zero. Production costs will run \$25,000 per year over the life of the project and the project requires an investment of \$30,000 in net working capital. If the tax rate is 35% and required return is 10%, what bid price per rivet should you submit? a. \$6.13 b. \$4.21 c. \$5.16 d. \$8.95 e. \$3.67

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Correct Answer: \$5.16 Algebraic Solution: To find the bid price, we need to calculate all other cash flows for the project, and then solve for the bid price.
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Unformatted text preview: We can solve for the necessary OCF that will give the project a zero NPV. The equation for the NPV of the project is: NPV = 0 = –\$50,000 – 30,000 + OCF(PVIFA 10%,3 ) + [(\$30,000) / 1.10 3 ] Solving for the OCF, we find the OCF that makes the project NPV equal to zero is: 3 57,460.55597 23,105.74018 N I/Y PV PMT 10 OCF = 23,105.74018 Or algebraically: OCF = \$57,460.55597 / PVIFA 10%,3 = \$23,105.74018 The easiest way to calculate the bid price is the tax shield approach, so: OCF = \$23,105.74018= [(P – Costs ](1 – tc) + tcD \$23,105.74018= [(P – \$25,000 ](1 – 0.35) + 0.35(\$50,000/3) P = 5.15729336 Bid P = \$5.16 Notes: none...
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18 FSDNPT (HW) - We can solve for the necessary OCF that...

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