Question

Consider a project to supply Detroit with 23,000 tons of machine screws annually for automobile production. You will need an initial $4,400,000 investment in threading equipment to get the project started; the project will last for 5 years. The accounting department estimates that annual fixed costs will be $1,050,000 and that variable costs should be $195 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $425,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $296 per ton. The engineering department estimates you will need an initial net working capital investment of $420,000. You require a return of 9 percent and face a tax rate of 21 percent on this project. What is the estimated OCF for this project? What is the estimated NPV for this project? ( Suppose you believe that the accounting department’s initial cost and salvage value projections are accurate only to within ±10 percent; the marketing department’s price estimate is accurate only to within ±15 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?

Answer 1