Consider a project to supply Detroit with 40,000 tons of machine screws annually
ID: 2651575 • Letter: C
Question
Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $850,000 and that variable costs should be $450 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $380,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $560 per ton. The engineering department estimates you will need an initial net working capital investment of $540,000. You require a 12 percent return and face a marginal tax rate of 38 percent on this project.
Suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What is the sensitivity of NPV to changes in quantity supplied? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Given the sensitivity number you calculated, what is the minimum level of output below which you wouldn’t want to operate? (Do not round intermediate calculations and round your final answer to the nearest whole number.)
Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $850,000 and that variable costs should be $450 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $380,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $560 per ton. The engineering department estimates you will need an initial net working capital investment of $540,000. You require a 12 percent return and face a marginal tax rate of 38 percent on this project.
Explanation / Answer
Operating Cashflow at 40,000 tonns Variable Fixed Income Add back Year Sales Cost Cost Income Tax after Tax Depreciation Net Cashinflows 0 0 0 1 22400000 18000000 850000 3550000 1349000 2201000 900000.00 3101000.00 2 22400000 18000000 850000 3550000 1349000 2201000 900000.00 3101000.00 3 22400000 18000000 850000 3550000 1349000 2201000 900000.00 3101000.00 4 22400000 18000000 850000 3550000 1349000 2201000 900000.00 3101000.00 5 22400000 18000000 850000 3550000 1349000 2201000 900000.00 3101000.00 6 22400000 18000000 850000 3550000 1349000 2201000 900000.00 3101000.00 PV factor Present Year Cash outflows Cash inclows Solvage Net Cashflows at 12% Value 0 -5400000 -5400000 1.00000 -5400000.0 1 3101000.00 3101000 0.89286 2768750.0 2 3101000.00 3101000 0.79719 2472098.2 3 3101000.00 3101000 0.71178 2207230.5 4 3101000.00 3101000 0.63552 1970741.6 5 3101000.00 3101000 0.56743 1759590.7 6 3101000.00 380000 3481000 0.50663 1763582.9 Total 13586000.0 7541993.9 Operating Cashflow at 35,000 tonns Variable Fixed Income Add back Year Sales Cost Cost Income Tax after Tax Depreciation Net Cashinflows 0 0 0 1 19600000 15750000 850000 3000000 1140000 1860000 900000.00 2760000.00 2 19600000 15750000 850000 3000000 1140000 1860000 900000.00 2760000.00 3 19600000 15750000 850000 3000000 1140000 1860000 900000.00 2760000.00 4 19600000 15750000 850000 3000000 1140000 1860000 900000.00 2760000.00 5 19600000 15750000 850000 3000000 1140000 1860000 900000.00 2760000.00 6 19600000 15750000 850000 3000000 1140000 1860000 900000.00 2760000.00 PV factor Present Year Cash outflows Cash inclows Solvage Net Cashflows at 12% Value 0 -5400000 -5400000 1.00000 -5400000.0 1 2760000.00 2760000 0.89286 2464285.7 2 2760000.00 2760000 0.79719 2200255.1 3 2760000.00 2760000 0.71178 1964513.5 4 2760000.00 2760000 0.63552 1754029.9 5 2760000.00 2760000 0.56743 1566098.1 6 2760000.00 380000 3140000 0.50663 1590821.7 Total 11540000.0 6140004.0 Answer a. Change of Quantity 5000 Change in OCF 2046000 Sensitivity (2046000/5000) 409.2 Answer 409.2 Answer b. Change of Quantity 5000 Change of NPV 1401989.9 Sensitivity (1401989.90/5000) 280.3979795 Answer: 280.40 Answer b. Minimum level of Output 26897.46178 (7541993.94/280.4) Answer: 26898 tons
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.