• (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.

1. What is the estimated OCF for this project? The NPV? Should you pursue this project?
2. 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.

1. What is the sensitivity of the project OCF to changes in the quantity supplied?
2. What about the sensitivity of NPV to changes in quantity supplied?
3. 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)