6. 10.00 points Consider a project to supply Detroit with 30,000 tons of machine

Question

6. 10.00 points Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,600,000 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 $750,000 and that variable costs should be $420 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 $400,000 after price of $550 per ton. The engineering department estimates you will need an initial net working capital investment of $460,000. You require a 17 percent return and face a marginal tax rate of 30 percent on this project a-1 What is the estimated OCF for this project? OCF S2665000 a-2 What is the estimated NPV for this project? (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 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)

Explanation / Answer

Cash Flows = Net Income + Depreciation + Investment + NWC + After-tax Salvage Value

OCF = $2,665,000

NPV = $1,290,578.14

Worst-case NPV is when price is lower and cost are higher.

Investment = 5,290,000, Salvage = 340,000, Price = 495, NWC = 483,000

Worst-case NPV = -$1,833,894.17

Best-case NPV is when price is higher and cost are lower.

Investment = 3,910,000, Salvage = 460,000, Price = 605, NWC = 437,000

Best-case NPV = -$4,415,050.45

Detroit 0 1 2 3 Investment -$4,600,000 NWC -$460,000 $460,000 Salvage $400,000 Sales $16,500,000 $16,500,000 $16,500,000 VC -$12,600,000 -$12,600,000 -$12,600,000 FC -$750,000 -$750,000 -$750,000 Depreciation -$1,533,333 -$1,533,333 -$1,533,333 EBT $1,616,667 $1,616,667 $1,616,667 Tax (30%) -$485,000 -$485,000 -$485,000 Net Income $1,131,667 $1,131,667 $1,131,667 Cash Flows -$5,060,000 $2,665,000 $2,665,000 $3,405,000 NPV $1,290,578.14

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