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 $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 OCF for this project is $307542.86 and the NPV is $. (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

What is the NPV? Please round 2 decimal places

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.

Explanation / Answer

Time line 0 1 2 3 4 5 6 7 Cost of new machine -1440000 Net working capital -352000 =Initial Investment outlay -1792000 after tax operating cash flow 307542.9 307542.9 307542.9 307542.9 307542.9 307542.9 307542.9 Reversal of net working capital 352000 Proceeds from sale of equipment =salvage value*(1-tax rate) 310860 Total non operating cf 662860 Total Cash flow for the period -1792000 307542.9 307542.9 307542.9 307542.9 307542.9 307542.9 970402.9 Required rate of return= 10% Discount factor= (1+ required rate)^N 1 1.1 1.21 1.331 1.4641 1.61051 1.771561 1.948717 Discounted cash flow= total cash flow/discount factor -1792000 279584.4 254167.7 231061.5 210055.9 190959.9 173599.9 497970.1 NPV= Sum of discounted cash flow = 45399.44

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