Consider a project to supply Detroit with 40,000 tons of machine screws annually
ID: 2718163 • Letter: C
Question
Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $1,440,000 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 $440,000 and that variable costs should be $180 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 $471,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $200 per ton. The engineering department estimates you will need an initial net working capital investment of $352,000. You require a 10 percent return and face a marginal tax rate of 34 percent on this project.
A. The estimated OCF for this project is?? Please round 2 decimal places.
B.The NPV is?? Please round 2 decimal places
C.Suppose you believe that the accounting department's initial cost and salvage value projections are accurate only to within ±14 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 ±3 percent.
Your worst-case NPV for this project is ?? Please round 2 decimal places
Best-case NPV for this prject?? Please round 2 decimal places
Explanation / Answer
Estimated Operating cash flow is $743840
NPV is $127391
Estimated Operating cash flows and net present value Years investmentsWORKING CAPITAL Receipts=
40000 X (200-180)-440000 Depreciation Before Tax
NCF Taxes -
@ 34% After Tax NCF = cash flow before tax - tax +Depreciation Disc Factor Discounted
Cash flow 0 -$1,792,000 $0 $0 -$1,792,000 $0 -$1,792,000 1 -$1,792,000 1 $360,000 -$138,429 $221,571 -$75,334 $284,666 0.909 $258,787 2 $360,000 -$138,429 $221,571 -$75,334 $284,666 0.826 $235,261 3 $360,000 -$138,429 $221,571 -$75,334 $284,666 0.751 $213,874 4 $360,000 -$138,429 $221,571 -$75,334 $284,666 0.683 $194,431 5 $360,000 -$138,429 $221,571 -$75,334 $284,666 0.621 $176,755 6 $360,000 -$138,429 $221,571 -$75,334 $284,666 0.564 $160,686 7 $823,000 $360,000 -$138,429 $1,044,571 -$355,154 $827,846 0.513 $424,816 OCF $743,840 NPV -$127,391