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Setting a Bid Pricea. $25b. $15c. $20d. $0

: CBD Inc, a processor of CBD oils, has asked you to help it determine a bid price for a RFQ (Request for Quotation) it has received from the Province of BC. The Province is looking for a Licensed Producer (LP) to supply it with 600,000 bottle of CBC oil each year for the next five years. In order to undertake this project, the firm will have to install a new bottling line at a cost of $250,000. This will be considered as a Class 8 asset with a 20% CCA rate and is subject to Accelerated Investment Incentive rules. The firm does not foresee selling the new bottling line at any time in the near future so it has not estimated a salvage value. Annual productions costs are estimated as follows: variable costs per bottle of $5.00 and fixed costs of $150,000. The firm expects the new contract would lead to an immediate increase of $40,000 in NWC, which will be recovered at the end of the project. The firm has a 30% tax rate and it wants a 15% return. What bid price should it submit?

Calculate the PV of the tax shield from CCA lost due to salvage.

Step-by-step answer

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