Another utilization of cash flow analysis

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Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Guthrie Enterprises needs someone to supply it with 155,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract. It will cost you $1,950,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $165,000. Your fixed production costs will be $280,000 per year, and your variable production costs should be $10.00 per carton. You also need an initial investment in net working capital of $145,000. The tax rate is 40 percent and you require a 14 percent return on your investment. Assume that the price per carton is $17.50. Calculate the project NPV. What is the minimum number of cartons per year that can be supplied and still break even? What is the highest fixed costs that could be incurred and still break even?

Reference no: EM13976225

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