Concept explainers
To determine: Bid price.
Capital Budgeting:
Decision related to the investment for the long run is called capital budgeting. Capital budgeting includes the investment in the heavy machinery and information technology.
The net present value is differential amount between the net
Explanation of Solution
Given,
Cost of the investment is 145,000,000.
Estimated life of the investment is 4 year.
Selling price of the project is $435.
Labor cost is 16.25 per hour.
Labor cost is increased by 2%.
Energy cost per physical unit is $3.80.
Energy cost is increased by 3%.
Inflation rate is 5%.
Tax rate is 34%.
Discount rate is 4%.
Formula to calculate the Net present value,
Working notes:
Calculate the
Calculate the depreciation for the 2nd year,
Calculate the depreciation for the 3rd year,
Calculate the depreciation for the 4th year,
Calculate the labor cost per hour for 2 years,
Calculate the labor cost per hour for 3 years,
Calculate the labor cost per hour for 4 years,
Calculate the energy cost for the 2 years,
Calculate the energy cost for the 3 years,
Calculate the energy cost for the 4 years,
Hence, net present value of the project is $22,418,247.
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Chapter 6 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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