Consider a project to supply Detroit with 30,000 tons of machine screws annually
ID: 2781777 • Letter: C
Question
Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $3,800,000 investment in threading equipment to get the project started; the project will last for four years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the four-year project life. It also estimates a salvage value of $340,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $380,000. You require a return of 12 percent and face a marginal tax rate of 38 percent on this project.
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 are your worst-case and best-case NPVs for this project? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers 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 are your worst-case and best-case NPVs for this project? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
The Best Case NPV is $ 4,538,513 and the Worst case NPV is -$1,430,456
30,000 tons annually BEST WORST free cash Flow per year Initial Investment 3,800,000 3,230,000 4,370,000 BEST WORST Salvage 340,000 391000 289000 Sales 13,500,000 14850000 12150000 Life 4 Variable Cost 10,500,000 10,500,000 10,500,000 Contribution 3,000,000 4,350,000 1,650,000 Annual Fixed Costs 600,000 Fixed Cost 600,000 600,000 600,000 Sale Price /Ton 450 495 405 depreciation 865,000 709750 1020250 Variable Cost/Ton 350 Net Profit 1,535,000 3,040,250 29,750 Tax @ 38% 583300 1155295 11305 W/Cap 380,000 361000 399000 PAT 951,700 1,884,955 18,445 Tax 38% D/c Rate 12% Free Cash Flow 1,816,700 2,594,705 1,038,695 NORMAL year 0 1 2 3 4 INVESTMENT -3,800,000 340000 WCAP -380,000 FREE CASH FLOW 1,816,700 1,816,700 1,816,700 1,816,700 NET CASH FLOW -4,180,000 1,816,700 1,816,700 1,816,700 2,156,700 PV @ 12% -4,180,000 1,622,054 1,448,262 1,293,091 1,370,622 NPV 1,554,029 BEST year 0 1 2 3 4 INVESTMENT -3,230,000 391000 WCAP -361,000 FREE CASH FLOW 2,594,705 2,594,705 2,594,705 2,594,705 NET CASH FLOW -3,591,000 2,594,705 2,594,705 2,594,705 2,985,705 PV @ 12% -3,591,000 2,316,701 2,068,483 1,846,860 1,897,470 NPV 4,538,513 WORST year 0 1 2 3 4 INVESTMENT -4,370,000 289000 WCAP -399,000 FREE CASH FLOW 1,038,695 1,038,695 1,038,695 1,038,695 NET CASH FLOW -4,769,000 1,038,695 1,038,695 1,038,695 1,327,695 PV @ 12% -4,769,000 927,406 828,041 739,323 843,774 NPV -1,430,456Related Questions
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