Three bidders for a satellite system have given the following offers: Bidder A F
ID: 2626554 • Letter: T
Question
Three bidders for a satellite system have given the following offers:
Bidder A
First payment: $100m at the start
Second Payment: $250m at the beginning of second year
Third payment: $250m at the end of third year
Final payment: $400m on completion at the end of 4th year.
Bidder B
First payment: $ 200m at the start
Second Payment: $ 250m at the end of second year
Third payment: $ 250m at the end of third year
Final payment: $ 300m on completion at the end of 4th year.
Bidder C
First payment: No payment at start
Second Payment: $300m at the beginning of second year
Third payment: $200m at the beginning of third year
Final payment: $500m on completion at the end of 4th year.
All three bidders have been assessed to be technically compliant.
a) Assuming 8% discount +inflation rate, which bidder will you recommend to your management?
b) The annual operations &maintenance after completion is estimated to be $40 million, payable at the end of each year and with 5% annual increase thereafter.
Your customer has committed to pay $250 million annually at the end of the each year after completion, with the first payment at the end of 5th year from start and with 5% annual increase thereafter. The discount + inflation rate is still 8%.
For the best bidder, calculate the NPV until it becomes positive.
Explanation / Answer
Answer a
Bidder C
Since the highest NPV is for bidder B at 771.6, hence bidder B should be selected
Bidder A 0 1 2 3 4.0 Net cash flows 100.0 250.0 0.0 250.0 400.0 Discounting factor 0.926 0.857 0.794 0.735 0.681 Present value of cash flows 92.6 214.3 0.0 183.8 272.2 Net present value 762.9