Consider a project to supply Detroit with 30,000 tons of machine screws annually

Question

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,400,000 investment in threading equipment to get the project started; the project will last for three years. The accounting department estimates that annual fixed costs will be $650,000 and that variable costs should be $250 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $260,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $390 per ton. The engineering department estimates you will need an initial net working capital investment of $440,000. 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?

  

  

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))

  

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,400,000 investment in threading equipment to get the project started; the project will last for three years. The accounting department estimates that annual fixed costs will be $650,000 and that variable costs should be $250 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $260,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $390 per ton. The engineering department estimates you will need an initial net working capital investment of $440,000. You require a 18 percent return and face a marginal tax rate of 30 percent on this project.

Explanation / Answer

a-1

Thus, operating Cash flow is $ 29,25,000.

a-2

Thus, Net Present Value is $ 1,519,748.32.

Workng:

Schedule of operating Cash Flow ($) Sale Price 390.00 Less : Variable Cost 250.00 Contribution Margin per ton 140.00 Total Contribution 42,00,000.00 Less:Fixed cost 6,50,000.00 Less:Depreciation 14,66,666.67 Net Profit Before tax 20,83,333.33 Less:Tax 6,25,000.00 Net profit After Tax 14,58,333.33 Add:Depreciation 14,66,666.67 Operating Cash flow 29,25,000.00

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