The No-Shoplift Security Company Is Interested In Bidding

The No Shoplift Security Company Is Interested In Bidding On A Contrac

The No-Shoplift Security Company is considering submitting a bid for a contract to install a new security system across a chain of large department stores. The project involves phased installations in 10 stores annually over a five-year period. The financial details provided include the costs for hardware, labor, materials, equipment purchase and sale, and working capital investment, all of which need to be evaluated to determine an appropriate bid price that ensures a 10 percent return on investment.

The hardware cost per installation is $50,000. The labor and material costs per installation amount to approximately $15,000. In addition, No-Shoplift must invest $100,000 in new equipment, which will be depreciated evenly over five years, straight-line, until it reaches zero book value. The equipment is expected to be sold after five years for $25,000. Moreover, the company must invest $50,000 in net working capital, which is assumed to be recovered at the end of five years. The company's required rate of return on this project is 10 percent, and the relevant tax rate is 34 percent, affecting the calculation of net cash flows.

The problem is to determine the optimal bid price per store installation that will enable No-Shoplift to meet its desired return, accounting for all costs, depreciation, tax implications, and cash flows related to the project.

Paper For Above instruction

The bidding strategy for No-Shoplift Security Company requires a comprehensive financial analysis to ensure that any bid submitted is profitable, fulfilling the company's investment return requirements of 10 percent. This process involves calculating the project's total cash flows, accounting for initial investments, operating costs, depreciation, tax effects, and terminal cash flows, and subsequently deriving the bid price per installation based on these financial parameters.

Analysis of Costs and Investments

The primary costs per installation include the hardware purchase of $50,000 and the labor and material costs totaling $15,000. Therefore, the direct cost per installation amounts to $65,000. Over five years, with 10 installations annually, the company plans to install the system in all target stores, resulting in a total of 50 installations. The hardware costs, being per installation, sum to a significant expense that must be recouped through the bid.

In addition, capital expenditures involve purchasing equipment at $100,000, which will be depreciated straight-line over five years. The annual depreciation expense is calculated as $100,000 divided by five, equating to $20,000 per year. This depreciation reduces taxable income and provides tax shields annually.

Tax Implications and Cash Flows

The company's effective tax rate is 34 percent. Depreciation reduces taxable income, resulting in annual tax savings of $20,000 times 34%, i.e., $6,800. The net income impact is, therefore, adjusted accordingly. Furthermore, after five years, the equipment will be sold for $25,000, which will generate a taxable gain or loss depending on the book value. Since the equipment is fully depreciated to zero, the sale constitutes a gain of $25,000, which is taxable at 34%, resulting in a tax of $8,500. The after-tax salvage value, therefore, is $25,000 minus $8,500, equaling $16,500.

Working Capital Considerations

An investment of $50,000 in net working capital is required at the outset and is recovered at the end of five years, implying an additional cash inflow at project termination.

Calculating Annual and Total Cash Flows

The total operating costs, including hardware and labor/materials, are directly tied to the number of installations. To determine bid price per installation, the company needs to consider the cash flows generated from each installation, including the depreciation tax shield, operational cash flows, and recoveries.

Annual cash flows before taxes include the revenue captured through the bid price, less operating costs. After accounting for taxes, depreciation, and salvage proceeds, the net cash flow per period can be calculated. The initial investment includes the hardware costs (per installation), the equipment purchase, and working capital, all of which influence the bid price.

Deriving the Required Bid Price

Given the above, the company must set a bid price per installation so that the net present value (NPV) of the project’s cash flows equals zero or, in this case, provides the targeted 10 percent return. This involves discounting the future cash flows, considering the initial investments, and incorporating the incremental revenue from each bid.

The NPV can be formulated as:

NPV = Σ [Net cash flow per installation / (1 + r)^t] - Initial investments

where r is the required return of 10%, and t is each period (year).

By solving this equation for the bid price, considering the total costs, depreciation, tax effects, salvage value, and recovered working capital, the company can determine the minimum bid price per store installation necessary to meet its financial objectives.

Conclusion

In conclusion, No-Shoplift Security Company must carefully evaluate all input costs, anticipated cash inflows, tax effects, and salvage and working capital recovery to establish a bid price that provides a 10 percent return. This comprehensive financial analysis ensures that bids are competitive yet profitable, sustaining the company's strategic and financial goals. Using the detailed cost assessments and cash flow calculations, the company can derive an optimal bid that covers all expenditures and desired profit margins, securing successful project procurement and financial viability.

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