Consider a project to supply Detroit with 41,000 tons of machine screws annually
ID: 2667797 • Letter: C
Question
Consider a project to supply Detroit with 41,000 tons of machine screws annually for automobile production. You will need an initial $1,681,000 investment in threading equipment to get the project started; the project will last for 7 years. The accounting department estimates that annual fixed costs will be $328,000 and that variable costs should be $160 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 7-year project life. It also estimates a salvage value of $374,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $170 per ton. The engineering department estimates you will need an initial net working capital investment of $328,000. You require a 14 percent return and face a marginal tax rate of 39 percent on this project.
a.
The estimated OCF for this project is $ and the NPV is $. (Do not include the dollar signs ($). Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
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 ±9 percent; and the engineering department's net working capital estimate is accurate only to within ±5 percent. Your worst-case NPV for this project is $ and your best-case NPV is $.
Explanation / Answer
Sales
6970000
Less:Variable cost
6560000
Fixed cost
328000
Depreciation
186714
EBT
-104714
Tax 39%
0
Net loss
Years Initial Investment NPV at 14% 0 -2009000 -2009000.00 1 82000.00 71929.82 2 82000.00 63096.34 3 82000.00 55347.66 4 82000.00 48550.58 5 82000.00 42588.23 6 82000.00 37358.10 7 456000.00 182234.62 PV of project 182234.62 Less: Initial cost -2009000.00 Negititve NPV -1826765.38