Reference no: EM132467660

With the ground broken for the construction of its new home (the Nicol Building), the Sprott School of Business needs someone to supply it with 250 customized computers per year for the next 5 years, and you have decided to bid on the contract. It will cost you $125,000 to install the equipment necessary to start production. The equipment will be depreciated at 30 percent (class 10), and you estimate that it can be salvaged for 20.00% (of the original cost) at the end of the 5- year contract. Your fixed production costs will be $50,000 per year, and your variable production costs should be $600 per computer. You also need an initial investment in net working capital of $13,000.

Assuming that your tax rate is 34 percent and you require a 12 percent return on your investment:

Question a) What is the depreciation tax shield in the third year of this project?

Question b) What is the present value of the CCA tax shield?

Question c) What is the minimum price that your company should bid per single computer? Assuming you believe that Sprott School of Business will pay $975.00 per customized computer, what is the NPV of this project? Should you submit a bid given this new information?