Capital Budgeting Green State Enginnovation is considering a contract for a project to supply Orange Bay Area Automotive Solutions with 148,000 tons of machine screws annually for automobile production Green State Enginnovation will need an initial $4,600,000 investment in threading equipment to get the project started the project will last for seven years. The accounting department estimates that annual fixed costs will be $2,325,000 and that variable costs should be $293.25 per ton: accounting will depreciate the initial fixed asset investment straight-line to zero over the seven-year project life. It also estimates a salvage value of $820.000 after dismantling costs. The initial investment and salvage value are accurate within +/- 6.5% of the initial projections. The marketing department estimates that the automakers will approve the contract at a selling price of $375 per ton. The engineering department estimates that Green State Enginnovation will need an initial net working capital investment of 1,200,000, but management expects to recover their net working capital in the terminal year of the project. Consider the units produced, sales price, variable costs, and fixed costs to be accurate within +/- 8% of the projections. Unfortunately, a cheaper line of screws that are sold by Green State Enginnovation to Orange Bay Area Automotive Solutions is expected to decrease by 20.000 tons annually for the length of the project. This cheaper line of screws are sold at a price of $295 per ton and have a variable cost of $200 per ton. Also consider, that the Green State Enginnovation is offered a similar contract with Central CAMobility, Inc. that has an expected net present value of $4,900,000, a payback period of 5.2 years, and IRR of 18.25%, but it comes with a non-compete clause that will not allow you to pursue the contract with Orange Bay Area Automotive Solutions. Green State Enginnovation requires a return of 14.25 percent and faces a marginal tax rate of 21 percent on this project. Your group works in the Corporate Finance Division and have been tasked by Green State Enginnovation's VP-Capital Projects, Jamila Price, to evaluate this project. The VP would like to know the following in an executive summary: 5. What is the sensitivity of the project NPV to changes in the variable costs ANPV/AVC? 6. What is the sensitivity of the project NPT to changes in the fixed costs ANPV/AFC? 7. Which of these items have the greatest impact on the project's NPV? 8. Jamila Price is a little unsure about Orange Bay Area Automotive Solutions' actual machine screw requirements. So, she also wants to know the minimum level of output that you recommend the company should not drop below under the base case scenario. (Calculate both accounting and financial break-even but recommend which of these estimates is most useful.)
