Consider a project to supply Detroit with 30,000 tons of machine screws annually

Question

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,600,000 investment in threading equipment to get the project started; the project will last for three years. The accounting department estimates that annual fixed costs will be $750,000 and that variable costs should be $420 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $550 per ton. The engineering department estimates you will need an initial net working capital investment of $460,000. You require a 17 percent return and face a marginal tax rate of 30 percent on this project.

b.Suppose you believe that the accounting department

b.Suppose you believe that the accounting department

Explanation / Answer

Worst Case Scenario 0 1 2 3 Sales 14850000 14850000 14850000 Initial Investment -4600000 Fixed Cost -862500 -862500 -862500 Variable Cost -14490000 -14490000 -14490000 Depreciation -1533333.33 -1533333.33 -1533333.33 Salvage Value 340000 Working Capital -483000 -483000 -483000 Net Cash Flows -4600000 -2518833.33 -2518833.33 -2178833.33 Tax @30% 0 0 0 Net Cash Flows after tax -4600000 -2518833.33 -2518833.33 -2178833.33 Add: Depreciation 1533333.33 1533333.33 1533333.33 Cash Flows -4600000 -985500.003 -985500.003 -645500.003 PVF@17% 1 0.8547 0.7305 0.6244 -4600000 -842306.853 -719907.752 -403050.202 NPV -6565264.81 Best Case Scenario 0 1 2 3 Sales 18150000 18150000 18150000 Initial Investment -4600000 Fixed Cost -637500 -637500 -637500 Variable Cost -10710000 -10710000 -10710000 Depreciation -1533333.33 -1533333.33 -1533333.33 Salvage Value 460000 Working Capital -437000 -437000 -437000 Net Cash Flows -4600000 4832166.67 4832166.667 5292166.67 Tax @30% 1449650 1449650 1587650 Net Cash Flows after tax -4600000 3382516.67 3382516.667 3704516.67 Add: Depreciation 1533333.33 1533333.33 1533333.33 Cash Flows -4600000 4915850 4915849.997 5237850 PVF@17% 1 0.8547 0.7305 0.6244 -4600000 4201576.99 3591028.423 3270513.54 NPV 6463118.953

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