Please help me solve this! That is the incorrect answer, I am looking for the co
ID: 2795789 • Letter: P
Question
Please help me solve this!
That is the incorrect answer, I am looking for the correct solution.
This is the fourth time I am posting this question, every prior attempt was inccorect. Please help as soon as you can!!
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial break-even level for the project. This type of analysis can be extended to many other types of problems Romo Enterprises needs someone to supply it with 112,000 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 $790,000 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 $62,000. Your fixed production costs will be $317,000 per year, and your variable production costs should be $9.50 per carton. You also need an initial investment in net working capital of $67,000. Assume your tax rate is 35 percent and you require a 12 percent return on your investment a. Assuming that the price per carton is $16.20, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV b. Assuming that the price per carton is $16.20, find the quantity of cartons per year you need to supply to break even. (Do not round intermediate calculations and round your answer to nearest whole number.) Quantity of cartons c. Assuming that the price per carton is $16.20, find the highest level of fixed costs you could afford each year and still break even. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Fixed costsExplanation / Answer
a) ROMO ENTERPRISES: ANNUAL OPERATING CASH FLOWS: # of cartons of machine screws to be supplied 112000 Sales at $16.20 per carton 1814400.00 Variable cost at $9.50 1064000.00 Fixed costs 317000.00 Depreciation (790000/5) 158000.00 NOI 275400.00 Tax at 35% 96390.00 NOPAT 179010.00 Add: Depreciation 158000.00 Annual OCF 337010.00 CALCULATION OF NPV: PV of OCF (Years 1 to 5) = 337010*PVIFA(12,5) = 337010*3.60478 = 1214846.91 PV of after tax salvage value = 62000*65%/1.12^5 = 22867.30 PV of recouped NWC = 67000/1.12^5 = 38017.60 PV of cash inflows 1275731.81 Less: Initial investment (790000+67000 NWC) 857000.00 NPV 418731.81 Answer b) For financial break even, the NPV should be 0 or PV of cash inflows should equal PV of cash outflows. Hence, 857000 = [q*(16.20-9.50)-317000]*0.65*PVIFA(12,5)+158000*0.35*PVIFA(12,5)+22867+38018 where q = the quantity for breaking even. Solving for q 857000-22867-38018-158000*0.35*3.60478 = (q*6.7)-317000)*0.65*3.60478 796115-199344+742765 = 15.6988169q q = 1339536/15.6988169 = 85327 cartons Answer CHECK: ANNUAL OPERATING CASH FLOWS: # of cartons of machine screws to be supplied 85327 Sales at $16.20 per carton 1382297.40 Variable cost at $9.50 810606.50 Fixed costs 317000.00 Depreciation 158000.00 NOI 96690.90 Tax at 35% 33841.82 NOPAT 62849.08 Add: Depreciation 158000.00 Annual OCF 220849.09 CALCULATION OF NPV: PV of OCF (Years 1 to 5) = 220849*PVIFA(12,5) = 220849*3.60478 = 796112.36 PV of after tax salvage value = 62000*65%/1.12^5 = 22867.30 PV of recouped NWC =67000/1.12^5 = 38017.60 PV of cash inflows 856997.27 Less: Initial investment (790000+67000 NWC) 857000.00 NPV -2.73 ALMOST 0 c) For breaking even, the NPV should be zero. For 0 NPV, the fixed costs can increase by an amount equal to the Equivalent Annual NPV = 418731.81/PVIFA(12,5) = 418731.81/3.60478 = 116160.16 After tax Before tax = 116160.16/0.65 = 178707.93 Existing fixed cost 317000.00 Highest level of fixed costs that can be afforded to break even (financial break even) = 495707.93 Answer