Problem $11-27$ Scenario Analysis $[$LO$2]$

Consider a project to supply Detroit with $27,000$ tons of machine screws annually for

automobile production. You will need an initial $$5,300,000$ 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 $$1,275,000$ and that variable costs

should be $$240$ 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

$$650,000$ after dismantling costs. The marketing department estimates that the

automakers will let the contract at a selling price of $$350$ per ton. The engineering

department estimates you will need an initial net working capital investment of

$$510,000.$ You require a return of $14$ percent and face a tax rate of $25$ 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

and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

b$.$ Suppose you believe that the accounting department's initial cost and salvage value

projections are accurate only to within $+-5$ percent; the marketing department's price

estimate is accurate only to within $+-15$ 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$.,32\mathrm{.}16.)$