Question
Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $2,600,000 investment in threading
Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $2,600,000 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 $650,000 and that variable costs should be $200 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 $600,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $290 per ton. The engineering department estimates you will need an initial net working capital investment of $260,000. You require a return of 12 percent and face a marginal tax rate of 38 percent on 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? |
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