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 $2,400,000 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 $800,000 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 $440,000 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 $240,000. You require a 16 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 ±15 percent; the marketing department’s price estimate is accurate only to within ±10 percent; and the engineering department’s net working capital estimate is accurate only to within ±5 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))

  

a-1

What is the estimated OCF for this project?

Explanation / Answer

Calculation of OCF:

Calculation of Depreciation:

Depreciation = Cost / Life

Annual Depreciation = 2,400,000 / 5 = $480,000

Amount($) Sales 7,500,000 (25,000 x 300) Less: VC 5,000,000 (25,000 x 200) Less: Fixed Cost 800,000 Less: Depreciation 480,000 Income before tax 1,220,000 Less: Tax(38%) 463,600 Income after tax 756,400 Add: Depreciation 480,000 Operating Cash Flow 1,236,400

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