Consider a project to supply Detroit with 28,000 tons of machine screws annually for automobile production....
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Consider a project to supply Detroit with 28,000 tons of machine screws annually for automobile production. You will need an initial $6,100,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,475,000 and that variable costs should be $280 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 $850,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $398 per ton. The engineering department estimates you will need an initial net working capital investment of $590,000. You require a return of 12 percent and face a tax rate of 23 percent on this project. a-1. What is the estimated OCF for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a- What is the estimated NPV for this project? (Do not round intermediate calculations 2. and round your answer to 2 decimal places, e.g., 32.16.) 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 ±5 percent; and the engineering department's net working capital estimate is accurate only to within ±10 percent. What are your worst- case and best-case NPVs for this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Consider a project to supply Detroit with 28,000 tons of machine screws annually for automobile production. You will need an initial $6,100,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,475,000 and that variable costs should be $280 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 $850,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $398 per ton. The engineering department estimates you will need an initial net working capital investment of $590,000. You require a return of 12 percent and face a tax rate of 23 percent on this project. a-1. What is the estimated OCF for this project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a- What is the estimated NPV for this project? (Do not round intermediate calculations 2. and round your answer to 2 decimal places, e.g., 32.16.) 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 ±5 percent; and the engineering department's net working capital estimate is accurate only to within ±10 percent. What are your worst- case and best-case NPVs for this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
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Answer rating: 100% (QA)
SOLUTION a1 To calculate the estimated OCF for this project we need to calculate the annual cash inflows and outflows and then subtract the annual tax... View the full answer
Related Book For
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
Posted Date:
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