5 You want to bid on trucks You supply 15 trucks every year

(5) You want to bid on trucks. You supply 15 trucks every year for 10 years. The cost of the equipment is $250,000 and NWC is $100,000. The equipment is depreciated straight line to a book value of $50000. Its salvage value is $50,000. CoGs every year are $100000 the tax rate is 20%. The cost of capital is 20%. Find the bid price?

Solution

Initial investment = cost of equipment +NWC

                250000 +100000

                  350000

B)Let the bid price be X per truck

.Depreciation : [250000-50000]/10 = 20000

income before tax =Bid price -depreciation-COGS

         = X - 20000-100000

         = X- 120000

Income after tax =Annual income before tax [1-tax]

           =[X-120000][1-.20]

           = [X-120000]*.80

          = .80X - 96000

Annual cash flow = annual net income +depreciation (non cash)

                = [.80x -96000] +20000

                 =.80x - 76000

present value of annual cash flow =[PVA 20%,10*Annual cash flow ]+[PVF 20%,10*NWC realised]

          =[4.19247*(.80x-76000)] +[.16151*100000]

          = 3.353976 x - 318627.72+ 16151

           = 3.353976x - 302476.72

At breakeven ,present value of cash flow equals initial cost

       3.353976x -302476.72 = 350000

        3.353976x = 350000+302476.72

         x = 652476.72/3.353976

              = 194,538.28    [approx 194538]

Bid price = $ 194,538