Fuel Pump Manufacturers (FPM)is negotiating with Pop's Auto Supply, a national chain, to supply fuel pumps for the next 4 years. Pop's guarantees to purchase 1 million fuel pumps each year at a predetermined price. FPM would need to invest in additional machinery at a cost of $2 million. Other incremental costs associated with the order include $250,000 per year for fixed costs and $5 per fuel pump for variable costs. FPM has already spent $20,000 in legal fees and travel costs attempting to land this contract with Pop's. The terminal value of the machinery is expected to be $200,000 at the end of 4 years. The machinery would be amortized for income tax purposes using straight line amortization over a 4-year life and ignoring the half-year convention. FPM's marginal income tax rate is 30%, and its discount rate is 12%.
The present value annuity factors for 12% are: 1 year = 0.893, 2 years = 1.690, 3 years = 2.402, 4 years = 3.037 and 5 years = 3.605.
a)What is the minimum acceptable price for the fuel pumps? Hint: This is the price that would result in an NPV of zero.
b)Describe three uncertainties about the NPV computations in part (a).

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The Answer of Fuel Pump Manufacturers (FPM)is negotiating with Pop's Auto Supply, a national chain, to supply fuel pumps for the next 4 years. Pop's guarantees to purchase 1 million fuel pumps each year at a predetermined price. FPM would need to invest in additional machinery at a cost of $2 million. Other incremental costs associated with the order include $250,000 per year for fixed costs and $5 per fuel pump for variable costs. FPM has already spent $20,000 in legal fees and travel costs attempting to land this contract with Pop's. The terminal value of the machinery is expected to be $200,000 at the end of 4 years. The machinery would be amortized for income tax purposes using straight line amortization over a 4-year life and ignoring the half-year convention. FPM's marginal income tax rate is 30%, and its discount rate is 12%.
The present value annuity factors for 12% are: 1 year = 0.893, 2 years = 1.690, 3 years = 2.402, 4 years = 3.037 and 5 years = 3.605.
a)What is the minimum acceptable price for the fuel pumps? Hint: This is the price that would result in an NPV of zero.
b)Describe three uncertainties about the NPV computations in part (a).

Fuel Pump Manufacturers (FPM)is Negotiating with Pop's Auto Supply, a National