Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,100,000 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 $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.

What is the estimated OCF for this project?

What is the estimated NPV for this project?

Suppose you believe that the accounting departments initial cost and salvage value projections are accurate only to within 15 percent; the marketing departments price estimate is accurate only to within 10 percent; and the engineering departments net working capital estimate is accurate only to within 5 percent. What is the worst-case NPV for this project? The best-case NPV?

a-1. OCF
a-2. NPV
b. Worst-case NPV
b. Best-case NPV