Question

Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production.

- Initial investment of $5,600,000 in threading equipment

- the project will last for 6 years.

-The accounting department estimates that annual fixed costs will be $600,000

-variable costs should be $250 per ton.

- depreciate initial investment straight-line to 0 over 6 years with salvage value of $450,000

-contract at selling price of $340 per ton

- the engineering department estimates you will need an initial net working capital investment of $560,000.

- return of 13% and marginal tax rate of 24%

A) Whats the sensitivity of the project OCF to changes in quantity supplied?

B) What about the sensitivity of NPV to changes in quantity supplied?

Answer 1

1.
=(Price-Variable Cost)*(1-tax rate)
=(340-250)*(1-24%)
=68.40000

2.
=Sensitivity of OCF/return*(1-1/(1+return)^t)
=68.40000/13%*(1-1/1.13^6)
=273.43241