Question

Consider a project to supply Hamilton with 35,000 tonnes of machine screws annually for automobile production. You will need an initial $2,900,000 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 $495,000 and that variable costs should be $285 per tonne; accounting will depreciate the initial fixed asset investment at a CCA rate of 30 percent over the five-year project life. It also estimates a salvage value of $300,000 after dismantling costs. The marketing department estimates that the automakers will let you have the contract at a selling price of $345 per tonne. The engineering department estimates you will need an initial net working capital investment of $450,000. You require a 13 percent return and face a marginal tax rate of 38 percent on this project. Assets will remain in the CCA class after the end of the project.
a. What is the estimated operating cash flow 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?


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  • CreatedJune 17, 2015
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