Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider a project to supply Detroit with 2 0 , 0 0 0 tons of machine screws annually for automobile production. You will need an

Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3.1 million 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 $925,000 and that variable costs should be $185 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 $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $295 per ton. The engineering department estimates you will need an initial net working capital investment of $380,000. You require a return of 13 percent and face a tax rate of 22 percent on this project.
a. Suppose youre confident about your own projections, but youre a little unsure about Detroits actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.)
b. What is the sensitivity of NPV to changes in quantity supplied? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g.,32.16.)
c. Given the sensitivity number you calculated, what is the minimum level of output below which you wouldnt want to operate? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g.,32.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Essential Nonprofit Fundraising Handbook

Authors: Michael A. Sand, Linda Lysakowski

1st Edition

1601630727, 978-1601630728

More Books

Students also viewed these Finance questions

Question

47. What is the general idea behind MEMS storage?

Answered: 1 week ago