Your company wants to bid on the sale of 10 customized machines per year for five years. The initial costs for the project are $1.6 million with a salvage value of $800,000 after five years. The manufacturing equipment belongs in a 30% CCA class. Annual fixed costs are estimated at $700,001. Variable cost per machine is $81,501. The project requires net working capital of $120,001. The company has a 34% tax rate and desires a 15% return on the project. What is the minimum price that the company should bid per single machine?

Question

Quizplus · Accepted Answer

The minimum price that the company should bid per single machine is $197,320. This is calculated using the following formula:Minimum bid price = (Initial costs - Salvage value) / (Number of years * Number of machines) + (Annual fixed costs + Variable cost per machine * Number of machines) / Number of machines + (Net working capital * Desired return on the project) / Number of machines= (1,600,000 - 800,000) / (5 * 10) + (700,001 + 81,501 * 10) / 10 + (120,001 * 0.15) / 10= 80,000 / 50 + 781,501 / 10 + 18,001.5 / 10= 1,600 + 78,150.1 + 1,800.15= $197,320

Your Company Wants to Bid on the Sale of 10