Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial \($750,000\) 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 \($150,000\) and that variable costs should be \($180\) 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 \($500,000\) after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of

\($210\) per ton. The engineering department estimates you will need an initial net working capital investment of \($450,000.\) You require an 11 percent return and face a marginal tax rate of 38 percent 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 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 your worst-case scenario for this project? Your best-case scenario? Do you still want to pursue the project?