Consider a project to supply Detroit with 20,000 tons of machine screws annually
ID: 2804626 • Letter: C
Question
Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,400,000 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 $800,000 and that variable costs should be $180 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 $620,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $300 per ton. The engineering department estimates you will need an initial net working capital investment of $340,000. You require a return of 11 percent and face a marginal tax rate of 38 percent on this project.
What is the estimated OCF for this project? (Do not round intermediate calculations. Enter your answer in whole dollars, not millions of dollars, e.g., 1,234,567.)
What is the estimated NPV for this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and 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 the worst-case NPV for this project? The best-case NPV? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,400,000 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 $800,000 and that variable costs should be $180 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 $620,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $300 per ton. The engineering department estimates you will need an initial net working capital investment of $340,000. You require a return of 11 percent and face a marginal tax rate of 38 percent on this project.
Explanation / Answer
Statement showing NPV
Statement showing best case senerio
SPPU = 300+10% = 330
Initial cost = 3400000*0.85=2890,000
Salvage value = 620000+15%=713000
WC = 340000-5% = 323000
Statement showing Worst case NPV
SPPU = 300-10% = 270
Initial cost = 3400000*1.15=3910000
Salvage value = 620000-15%=527000
WC = 340000+5% = 357000
Particulars 1 2 3 4 SPPU 300 300 300 300 VCPU 180 180 180 180 CPU 120 120 120 120 Total units 20000 20000 20000 20000 Total contribution 2400000 2400000 2400000 2400000 Fixed cost 800000 800000 800000 800000 Depreciation(3400000/4) 850000 850000 850000 850000 PBT 750000 750000 750000 750000 Tax @ 38% 285000 285000 285000 285000 PAT 465000 465000 465000 465000 Add: depreciation 850000 850000 850000 850000 Cash flow 1315000 1315000 1315000 1315000 Salvage value(620000-38%) 384400 WC release 340000 Total cash flow 1315000 1315000 1315000 2039400 PVIF @ 11% 0.900901 0.811622 0.731191 0.658731 PV 1184685 1067283 961516.7 1343416 4556901 Less:Initial investment Purchase price 3400000 WC requirement 340000 NPV 816901Related Questions
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