In: Finance
Consider a project to supply Detroit with 25,000 tons of machine
screws annually for automobile production. You will need an initial
$2,000,000 investment in threading equipment to get the project
started; the project will last for five years. The accounting
department estimates that annual fixed costs will be $800,000 and
that variable costs should be $300 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the five-year project life. It also estimates a salvage value
of $220,000 after dismantling costs. The marketing department
estimates that the automakers will let the contract at a selling
price of $360 per ton. The engineering department estimates you
will need an initial net working capital investment of $200,000.
You require a return of 10 percent and face a marginal tax rate of
38 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.)
OCF $
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.)
NPV $
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 ±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. Do not round intermediate calculations
and round your answers to 2 decimal places, e.g.,
32.16.)
Worst-case | $ | |
Best-case | $ | |
Based on the given data, pls find below workings:
Base Case, Best Case and Worst Case scenarios produced below: