# Question

Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $3,600,000 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 $850,000 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 $500,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $280 per ton. The engineering department estimates you will need an initial net working capital investment of $360,000. You require a 13 percent return and face a marginal tax rate of 38 percent on this project.

a. What is the estimated OCF for this project? The NPV? Should you pursue this project?

b. Suppose you believe that the accounting department’s initial cost and salvage value projections are accurate only to within ±15 percent; the marketing department’s price estimate is accurate only to within ±10 percent; and the engineering department’s net working capital estimate is accurate only to within ±5 percent. What is your worst-case scenario for this project? Your best-case scenario? Do you still want to pursue the project?

a. What is the estimated OCF for this project? The NPV? Should you pursue this project?

b. Suppose you believe that the accounting department’s initial cost and salvage value projections are accurate only to within ±15 percent; the marketing department’s price estimate is accurate only to within ±10 percent; and the engineering department’s net working capital estimate is accurate only to within ±5 percent. What is your worst-case scenario for this project? Your best-case scenario? Do you still want to pursue the project?

## Answer to relevant Questions

What happens to a future value if you increase the rate r ? What happens to a present value?For each of the following, compute the futurevalue:Imprudential, Inc., has an unfunded pension liability of $575 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the ...Wainright Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent?Year ...The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 5.8 percent, how much will you pay for the ...Post your question

0