Question
Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years.
Guthrie Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years. It will cost $1,820,000 to install the equipment necessary to start production; youll depreciate this cost straight-line to zero over the projects life. You estimate that in five years this equipment can be salvaged for $152,000. Your fixed production costs will be $267,000 per year, and your variable production costs should be $9.60 per carton. You also need an initial investment in net working capital of $132,000. The tax rate is 22 percent and you Year Market Value ($ millions) 1 $ 14.70 2 11.70 3 9.20 4 1.95 4 | P a g e require a return of 12 percent on your investment. Assume that the price per carton is $16.20. a. Calculate the project NPV. b. What is the minimum number of cartons per year that can be supplied and still guarantee a zero NPV? Verify that the quantity you calculated is enough to at least have a zero NPV. c. What is the highest fixed costs that could be incurred and still guarantee a zero NPV? Verify that the fixed costs you calculated are enough to at least have a zero NPV. Show step by step solution
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