Consider a project to supply Detroit with 25,000 tons of machine screws annually

Question

Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $2,600,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $650,000 and that variable costs should be $200 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $600,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $290 per ton. The engineering department estimates you will need an initial net working capital investment of $260,000. You require a 12 percent return and face a marginal tax rate of 38 percent on this project. What is the estimated OCF for this project? What is the estimated NPV for this project? (Round your answer to 2 decimal places, (e.g., 32.16)) Suppose you believe that the accounting department's initial cost and salvage value projections are accurate only to within plusminus15 percent; the marketing department's price estimate is accurate only to within plusminus10 percent; and the engineering department's net working capital estimate is accurate only to within plusminus5 percent. What is your worst-case and best-case scenario for this project? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places, (e.g., 32.16))

Explanation / Answer

a-1] OCF =$1,189,600

a-2] NPV = $1,916,228.87

b]

Best Case:

Worst Case:

Years 0 1 2 3 4 5 Intial Outlay Investment -2600000 Net Working Capital -260000 Operating cash flow Revenue 7250000 7250000 7250000 7250000 7250000 Variable Cost 5000000 5000000 5000000 5000000 5000000 Fixed cost 650000 650000 650000 650000 650000 EBTDA 1600000 1600000 1600000 1600000 1600000 Depreciation 520000 520000 520000 520000 520000 PBT 1080000 1080000 1080000 1080000 1080000 PAT 669600 669600 669600 669600 669600 Operating Cash flow = PAT + Dep. 1189600 1189600 1189600 1189600 1189600 Terminal Cash Flow Salvage value 600000 Working Capital 260000 Total Cash Flow -2860000 1189600 1189600 1189600 1189600 2049600 NPV= 1916228.87

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