The SSC Company is considering making a bid to supply the highway department with rock salt to drop on roads in the coun
Posted: Sun Apr 17, 2022 6:23 pm
The SSC Company is considering making a bid to supply the
highway department with rock salt to drop on roads in the county
during winter. The contract will guarantee a minimum of 50,000 tons
in each year, but the actual quantity may be above that amount if
conditions warrant. Management believes that the actual quantity
will average 80,000 tons per year. The firm will need an initial
$1,600,000 investment in processing equipment to get the project
started. The contract will last for five years and is not expected
to be renewed. The accounting department has estimated that annual
fixed costs will be $500,000 and that variable costs should be
about $45 per ton of the final product. The new equipment will be
depreciated using MACRS with a class life of five years.
At the end of the project, it is estimated that the state will
grant the contract a selling price of $60 per ton, though it may
get some lower bids if the contract is opened for competitive
bidding. The engineering department estimates that the project will
need an initial net working capital investment of $115,000. The
firm’s WACC is 10%, and the marginal tax rate is 35%.
Set up a worksheet containing all of the relevant information in
this problem, and operating cash flow statement that shows the
total annual cash flows for each year, including the initial
outlay.
Calculate the payback period, discounted payback period, NPV,
IRR, and MIRR of this project. Is the project acceptable? Why?
If the state decides to open the project for competitive
bidding, what is the lowest bid price that you can enter without
reducing shareholders’ wealth? Explain why your answer is
correct.
Create a sensitivity table showing the effect of the changes in
both the variable cost per ton
and salvage value of equipment on the NPV. Use a range of -15%
to +15%, with 5%
increments. What do you conclude?
**This is an excel assignment,
please show steps and show formulas
highway department with rock salt to drop on roads in the county
during winter. The contract will guarantee a minimum of 50,000 tons
in each year, but the actual quantity may be above that amount if
conditions warrant. Management believes that the actual quantity
will average 80,000 tons per year. The firm will need an initial
$1,600,000 investment in processing equipment to get the project
started. The contract will last for five years and is not expected
to be renewed. The accounting department has estimated that annual
fixed costs will be $500,000 and that variable costs should be
about $45 per ton of the final product. The new equipment will be
depreciated using MACRS with a class life of five years.
At the end of the project, it is estimated that the state will
grant the contract a selling price of $60 per ton, though it may
get some lower bids if the contract is opened for competitive
bidding. The engineering department estimates that the project will
need an initial net working capital investment of $115,000. The
firm’s WACC is 10%, and the marginal tax rate is 35%.
Set up a worksheet containing all of the relevant information in
this problem, and operating cash flow statement that shows the
total annual cash flows for each year, including the initial
outlay.
Calculate the payback period, discounted payback period, NPV,
IRR, and MIRR of this project. Is the project acceptable? Why?
If the state decides to open the project for competitive
bidding, what is the lowest bid price that you can enter without
reducing shareholders’ wealth? Explain why your answer is
correct.
Create a sensitivity table showing the effect of the changes in
both the variable cost per ton
and salvage value of equipment on the NPV. Use a range of -15%
to +15%, with 5%
increments. What do you conclude?
**This is an excel assignment,
please show steps and show formulas