Question
Consider a project to supply Detroit with 28,000 tons of screws annually for automobile production. You will need an intial $5,800,000 investment in threading equipment
Consider a project to supply Detroit with 28,000 tons of screws annually for automobile production. You will need an intial $5,800,000 investment in threading equipment to get the project started; the project will last for 6 years. The accoutning department estimates that annual fixed costs will be $1,400,000 and variable costs should be $265 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $775,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $380 per ton. The engineering department estimates that you will need an initial net working capital investment of $560,000. You require a return of 14 percent and face a tax rate of 25 percent.
1a) what is the estimated OCF for this project?
1b) What is the estimated NPV for this project? Round answer to two decimal places
2) Suppose you believe that the accounting department's initial cost and salvage value projections are accurate only to within + - 5 percent; the marketing department's price estimate is only accurate within + - 10 percent; and the engineering department's net working capital estimate is accurate only to within + - 15 percent. What are your worst-case and best-case NPVs for this project? Round answer to two decimal places.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started