Consider a project to supply Detroit with 40,000 tons of machine screws annually

Question

Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,800,000 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 $700,000 and that variable costs should be $200 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 $680,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $300 per ton. The engineering department estimates you will need an initial net working capital investment of $580,000. You require a 18 percent return and face a marginal tax rate of 30 percent on this project.

What is the estimated OCF for this project?

b) What is the estimated NPV for this project?

What is the estimated OCF for this project?

b) What is the estimated NPV for this project?

Explanation / Answer

a)

OCF = (Sales - Cost)(1 - tax rate) + (tax rate x Depreciation)

b)

NPV = (OCF x PVIFAr,t) - initial investment

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