Consider a project to supply Detroit with 40,000 tons of machine screws annually
ID: 2718230 • 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 $1,440,000 investment in threading equipment to get the project started; the project will last for 7 years. The accounting department estimates that annual fixed costs will be $440,000 and that variable costs should be $180 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 7-year project life. It also estimates a salvage value of $471,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $200 per ton. The engineering department estimates you will need an initial net working capital investment of $352,000. You require a 10 percent return and face a marginal tax rate of 34 percent on this project.
The estimated OCF for this project is?? NPV is??? Please round 2 decimal places
Explanation / Answer
Results may vary with your given answer based on discouting factor used. I have taken 4 digit factor for better accuracy Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discounting factor @10% 1 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 Amt in$ Yearly production 40,000 ton Sales Price/ton 200 Variable cost/ton 180 Fixed cost/year 440,000 Initial Investment Machine (1,440,000) NWC investment (352,000) Yearly revenue 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 Yearly variable cost 7,200,000 7,200,000 7,200,000 7,200,000 7,200,000 7,200,000 7,200,000 Fixed cost/year 440,000 440,000 440,000 440,000 440,000 440,000 440,000 Depreciation 205,714 205,714 205,714 205,714 205,714 205,714 205,714 Net Income before tax 154,286 154,286 154,286 154,286 154,286 154,286 154,286 Tax @34% 52,457 52,457 52,457 52,457 52,457 52,457 52,457 Net Income after Tax 101,829 101,829 101,829 101,829 101,829 101,829 101,829 Opearting Cash Flow 101,829 101,829 101,829 101,829 101,829 101,829 101,829 Post Tax salvage value(66% of receipt) 310,860 Total Cash Flow 101,829 101,829 101,829 101,829 101,829 101,829 412,689 PV of Cash Flows (1,792,000) 92,571 84,156 76,505 69,550 63,228 57,480 211,774 NPV $ (1,136,736) So NPV of project is $ (1,136,735.53)
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