Roads Co. is bidding for constructing 2 bridges per year around Sydney for the next 3 years. This project requires initial investment of $847,000 in specialized machinery. The machinery will be fully depreciated to zero book value using straight-line depreciation over the life of the project. The machinery can be sold at the end of the project for $415,000. You will also need $165,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year and the variable costs will be $1,640,000 per bridge. The required rate of return is 16 percent for this project and the tax rate is 24 percent. What is the minimal amount, rounded to the nearest $100, the firm should bid per bridge?
Step -1: - Computation of Initial Cash outflow.
Initial Investment = $847,000
Add: Net working capital = $165,000
Total Initial cash outflow = $847,000 + $165,000 = $1,012,000
Step - 2: - Computation of Present value of Cash flows
Fixed cost per year = $528,000
Variable cost per year ($1,640,000 * 2) = $3,280,000
Total Costs per year = $3,808,000
Present value of Annual cash out flows = [$3,808,000 / (1.16)1] + [$3,808,000 / (1.16)2] + [$3,808,000 / (1.16)3]
= $8,552,347
Step 3: Computation of present value of terminal cash flows.
Net gain on sale of Machine at end of 3rd year = $415,000 * (1 - 0.24) = $315,400(转载自赶due网info.gandue.net)
Net working capital recoup at end of 3rd year = $165,000
Present value of Terminal cash flows = $480,400 * 1/(1.16)3 = $307,771.95
.
Total Present value of Cash flows = $1,012,000 + $8,552,347 - $307,771.95
= $9,256,575.42
or minimal amount that can be bid for the project = $9,256,600
