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(2 Points) Scenario Analysis [LO2] Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an
- (2 Points) Scenario Analysis [LO2] Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4.3 million investment in threading equipment to get the project started; the project will last five years. The accounting department estimates the annual fixed costs will be $1.025 million and that variable costs should be $190 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimated salvage value of $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at selling price of $290 per ton. The engineering department estimates you will need an initial networking capital investment of $410,000. You require a return of 13 percent and face a tax rate of 22 percent on this project.
- What is the estimated OCF for this project? The NPV? Should you pursue this project?
- 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 within 10 percent; and the engineering department's net working capital estimate is accurate only within 5 percent . What is your worst-case scenario for this project? Your best-case scenario? Do you still want to pursue the project?
- Sensitivity Analysis [LO1] In the problem above, suppose you're confident about your own projections but you're a little unsure about Detroit's actual machine screw requirement.
- What is the sensitivity of the project OCF to changes in the quantity supplied?
- What about the sensitivity of NPV to changes in quantity supplied?
- Given the sensitivity number you calculated, is there some minimum level of output below which you wouldn't want to operate? Why?
(Please calculate using excel if possible) --> (I already have the answers to the first two questions, but I need the bottom three)
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