value: 10.00 points Consider a project to supply Detroit with 20,000 tons of mac
ID: 2800250 • Letter: V
Question
value: 10.00 points Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production You will need an initial $2,800,000 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 $750,000 and that variable costs should be $260 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 $220,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $370 per ton. The engineering department estimates you will need an initial net working capital investment of $280,000. You require a return of 14 percent and face a marginal tax rate of 38 percent on this project a-1 What is the estimated OCF for this project? (Do not round intermediate calculations. Round your answer to the nearest whole number, e.g., 32.) OCF $ 1111800 a-2 What is the estimated NPV for this project? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) NPV b. 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.) Worst-case Best-case $-1162614.18 $ 2636413.03Explanation / Answer
OCF = Net Income + Depreciation = $1,111,800
Cash Flows = OCF + Investment + NWC + Salvage Value x (1 - tax rate)
NPV = NPV(rate = 14%, 1111800....1528200) - 3080000 = $953,164.53
Worst-case scenario: Price = 333, Investment = -3,220,000, NWC = -294,000, Salvage = 187,000
=> Worst-case NPV = -949,704.19
Best-case scenario: Price = 407, Investment = -2,380,000, NWC = -266,000, Salvage = 253,000
=> Best-case NPV = $2,856,033.26
Detroit 0 1 2 3 4 5 Investment -$2,800,000 NWC -$280,000 $280,000 Salvage $220,000 Sales $7,400,000 $7,400,000 $7,400,000 $7,400,000 $7,400,000 VC -$5,200,000 -$5,200,000 -$5,200,000 -$5,200,000 -$5,200,000 FC -$750,000 -$750,000 -$750,000 -$750,000 -$750,000 Depreciation -$560,000 -$560,000 -$560,000 -$560,000 -$560,000 EBT $890,000 $890,000 $890,000 $890,000 $890,000 Tax (38%) -$338,200 -$338,200 -$338,200 -$338,200 -$338,200 Net Income $551,800 $551,800 $551,800 $551,800 $551,800 Cash Flows -$3,080,000 $1,111,800 $1,111,800 $1,111,800 $1,111,800 $1,528,200 NPV $953,164.53Related Questions
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