Setting a Bid Price: Company A needs to determine a bid price for a project it has received from Company B. Company B is looking for a Producer to supply it with 450,000 widgets each year for the next...

Setting a Bid Price: Company A needs to determine a bid price for a project it has received from Company B. Company B is looking for a Producer to supply it with 450,000 widgets each year for the next seven years. To undertake this project, company A will have to install new equipment at a cost of $510,000. This will be considered a Class 8 asset with a 20% CCA rate and is subject to Accelerated Investment Incentive rules. Company A expects to sell the equipment for $125,000 after 7 years. Annual productions costs are estimated as follows: variable costs per widget of $7.00 and fixed costs of $130,000 per year. Company A expects the new contract would lead to an immediate increase of $35,000 in NWC, which will be recovered at the end of the project. The firm has a 30% tax rate and it wants a 15% return. What bid price should it submit? What is the correct value for Step #5?

Multiple Choice

$8,056

$9,654

$3,214

$6,427