Question

Consider a project to supply Detroit with 27,000 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 5 years. The accounting department estimates that annual fixed costs will be $1,100,000 and that variable costs should be $205 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 $475,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $308 per ton. The engineering department estimates you will need an initial net working capital investment of $440,000. You require a return of 12 percent and face a tax rate of 23 percent on this project. a-1. What is the estimated OCF for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a-2. What is the estimated NPV for this project? (Do not round intermediate calculations and round your answer 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 ±5 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 ±15 percent. What are your worst-case and best-case NPVs for this project?

Answer 1

1) OCF (Operating Cash Flow) is as shown in excel below.

Formule shaeet is pasted below

OCF is given in Row 24 and NPV is given in cell B26

2a) As seen, NPV is $1,004,083

2b) Now for Best case NPV, salvage value is assumed to be increased by 5%, cost decreased by 5%. sale price is increased by 10%, NWC is reduced by 15%

NPV is $4,543,375 as shown in the sheet below.

Now for Worst case NPV, salvage value is assumed to be decreased by 5%, cost increased by 5%. sale price is decreased by 10%, NWC is increased by 15%

NPV is -$2,535,208 as shown in the sheet below.