In Problem 9.21, suppose you’re confident about your own projections, but you’re a little unsure about Hamilton’s actual machine screw requirements. What is the sensitivity of the project operating cash flow to changes in the quantity supplied? What about the sensitivity of NPV to changes in quantity supplied? Given the sensitivity number you calculated, is there some minimum level of output below which you wouldn’t want to operate? Why?

In problem 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.