You have the opportunity to bid on a project that involves manufacturing 110,000 units per year for 4 years.The project will require $698,000 in fixed assets that would be depreciated straight-line to zero over the project's life.These assets have an expected pretax salvage value of $149,000 at the end of the project. The project would require $56,000 of net working capital,all of which is recoverable,along with $312,000 in annual expenses.What is the minimum price per unit you should bid on this project if you require a rate of return of 18 percent and have a tax rate of 34 percent?

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Quizplus · Accepted Answer

NPV = 0 = -$698,000 - $56,000 + OCF[(1 - 1 / 1.18⁴)/ 0.18] + [$149,000(1 - 0.34)+ $56,000] / 1.18⁴ OCF = $250,698.01 $250,698.01 = [(Price per unit × 110,000)- $312,000](1 - 0.34)+ ($698,000 / 4)(0.34) Sales price = $5.4723 per unit The minimum annual price that should be bid is $5.4723 per unit based on the required return of 18 percent.

You Have the Opportunity to Bid on a Project That