Setting the Bidding Price: Example & Solution

Number of Trucks Sold/Year 5

Purchase price of truck platform is $10,000
Facilities Annual Rent $24,000
Labor and material cost to do the modifications per truck $4,000
New Equipment cost is $60,000
Project Life 4
Salvage Value of Equipment $5,000
Investment today in inventory and other working capital items is $40,000
Tax Rate 39%
Required Rate of Return 20%
Bidding Price (= Annual Sales/Number of Trucks) 26,918
PVIFAr,n = {[1-(1/(1+r)n)]/r} 2.588735

Year
Item 0 1 2 3 4
Sales = (NI/(1-T))+Platform Cost+Rent+Modification Costs+Depreciation
(= 22 + (18+19+20+21)) $134,589 $134,589 $134,589 $134,589
Price of Platform = No. of trucks*Per unit platform cost (=5*$10,000) $50,000 $50,000 $50,000 $50,000
Rent $24,000 $24,000 $24,000 $24,000
Modification Costs = No. of trucks*Per unit modification cost (=5*$4,000) $20,000 $20,000 $20,000 $20,000
Depreciation (using SLN) (= $60,000/4) $15,000 $15,000 $15,000 $15,000
EBIT = NI + Taxes = NI / (1-T); (Cell C24/(1-$F$10...) $25,589 $25,589 $25,589 $25,589
Taxes @ 39% = EBIT * T 9,980 9,980 9,980 9,980
Net Income = OCF - Depreciation; (Cell C25-C21) $15,609 $15,609 $15,609 $15,609
Operating Cash Flow (= NI + Depreciation) = PV of CFO / ((1-(1/(1+r)^n))/r); $30,609 $30,609 $30,609 $30,609
(Cell B29/Cell $F$13)
Change in NWC -$40,000 $40,000
Capital Spending (Note After-Tax Salvage Value) -$60,000 $3,050
Total Cash Flow (B26+B27) -$100,000
PV of CFO = CFO+PV(DNWC+Capital Spending); (Cell B28, F26 and F27) -$79,239 $25,508 $21,256 $17,714 $14,761
NPV $0

Notes:
For NPV to be zero, PV of inflows must equal PV of outflows