Scenario Analysis Consider a project to supply Italy with 40,000 tons of machine screws annually for automobile production. You will need an initial €1,500,000 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 €600,000 and that variable costs should be €210 per ton; accounting will depreciate the initial non-current asset investment using the 20 per cent reducing balance method over the five-year project life.

It also estimates a salvage value of €800,000 after dismantling costs. The marketing department estimates that the automakers will set the contract at a selling price of €230 per ton. The engineering department estimates you will need an initial net working capital investment of €450,000. You require a 13 per cent return and face a marginal tax rate of 32 per cent on this project.

(a) What is the estimated OCF for this project? The NPV? Should you pursue this project?

(b) Suppose you believe that the accounting department’s initial cost and salvage value projections are accurate only to within ±15 per cent; the marketing department’s price estimate is accurate only to within ±10 per cent; and the engineering department’s net working capital estimate is accurate only to within ±5 per cent. What is your worst-case scenario for this project? Your best-case scenario? Do you still want to pursue the project?