Consider a project to supply Detroit with 30,000 tons of machine screws annually
ID: 2637640 • Letter: C
Question
Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $3,800,000 investment in threading equipment to get the project started; the project will last for four years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the four-year project life. It also estimates a salvage value of $340,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $380,000. You require a 12 percent return and face a marginal tax rate of 38 percent on this project.
Suppose you
Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $3,800,000 investment in threading equipment to get the project started; the project will last for four years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the four-year project life. It also estimates a salvage value of $340,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $380,000. You require a 12 percent return and face a marginal tax rate of 38 percent on this project.
Explanation / Answer
year
0
1
2
3
4
equipment
-38,00,000.00
working capital
-3,80,000.00
Projected sales
135,00,000.00
135,00,000.00
135,00,000.00
135,00,000.00
Variable cost
-105,00,000.00
-105,00,000.00
-105,00,000.00
-105,00,000.00
Fixed Cost
-6,00,000.00
-6,00,000.00
-6,00,000.00
-6,00,000.00
Depreciation
-9,50,000.00
-9,50,000.00
-9,50,000.00
-9,50,000.00
Profit Before tax
14,50,000.00
14,50,000.00
14,50,000.00
14,50,000.00
Tax @ 38%
-5,51,000.00
-5,51,000.00
-5,51,000.00
-5,51,000.00
Profit After Tax
8,99,000.00
8,99,000.00
8,99,000.00
8,99,000.00
Add: Depreciation
9,50,000.00
9,50,000.00
9,50,000.00
9,50,000.00
Operating Cash Flow
18,49,000.00
18,49,000.00
18,49,000.00
18,49,000.00
Working capital recovered
3,80,000.00
Salvage Value after tax
2,10,800.00
Total Cash flow
-41,80,000.00
18,49,000.00
18,49,000.00
18,49,000.00
24,39,800.00
discount factor @ 12%
1.00
0.89
0.80
0.71
0.64
PV of cash flow
-41,80,000.00
16,50,893.00
14,74,011.00
13,16,082.00
15,50,537.00
PV of Cash Inflow
59,91,523.00
Pv of cash outflow
-41,80,000.00
NPV
18,11,523.00
a)
Now EBIT = S - VC - F - D
Here to make EBIT = -950000
So, -950000 = Q (450
year
0
1
2
3
4
equipment
-38,00,000.00
working capital
-3,80,000.00
Projected sales
135,00,000.00
135,00,000.00
135,00,000.00
135,00,000.00
Variable cost
-105,00,000.00
-105,00,000.00
-105,00,000.00
-105,00,000.00
Fixed Cost
-6,00,000.00
-6,00,000.00
-6,00,000.00
-6,00,000.00
Depreciation
-9,50,000.00
-9,50,000.00
-9,50,000.00
-9,50,000.00
Profit Before tax
14,50,000.00
14,50,000.00
14,50,000.00
14,50,000.00
Tax @ 38%
-5,51,000.00
-5,51,000.00
-5,51,000.00
-5,51,000.00
Profit After Tax
8,99,000.00
8,99,000.00
8,99,000.00
8,99,000.00
Add: Depreciation
9,50,000.00
9,50,000.00
9,50,000.00
9,50,000.00
Operating Cash Flow
18,49,000.00
18,49,000.00
18,49,000.00
18,49,000.00
Working capital recovered
3,80,000.00
Salvage Value after tax
2,10,800.00
Total Cash flow
-41,80,000.00
18,49,000.00
18,49,000.00
18,49,000.00
24,39,800.00
discount factor @ 12%
1.00
0.89
0.80
0.71
0.64
PV of cash flow
-41,80,000.00
16,50,893.00
14,74,011.00
13,16,082.00
15,50,537.00
PV of Cash Inflow
59,91,523.00
Pv of cash outflow
-41,80,000.00
NPV
18,11,523.00
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