Question

Consider a project to supply Detroit with 31,000 tons of machine screws annually for automobile production. You will need an initial $6,200,000 investment in threading equipment to get the project started; the project will last for 5 years. The accounting department estimates that annual fixed costs will be $1,500,000 and that variable costs should be $285 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $875,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $404 per ton. The engineering department estimates you will need an initial networking capital investment of $600,000. You require a return of 13 percent and face a tax rate of 24 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.) Suppose you believe that the accounting department's initial cost and salvage value projections are accurate only to within 215 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 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.) $ 1,961,240 784,726.00 a-1. OCF a-2. NPV b. Worst-case NPV Best-case NPV

(Answer B please, Part A is correct)

Answer 1

Part A

3 a) Calculation of operating flows 5 Particulars 6 Sales price 7 Variable cost 8 Contribution 9 Fixed Cost 10 Earning before depreciaiton and tax 11 Depreciation 12 PBT 13 Tax expense @ 24% 14 PAT 15 CFAT (PAT+Depreciation) Amount 1,25,24,000 88,35,000 36,89,000 15,00,000 21,89,000 12,40,000 9,49,000 2,27,760 7,21,240.00 19,61,240.00 17 b) Calculation of NPV 78 Present value of cash inflows (Note- 19 1) 68,98,134.64 Present value of cash outflows (Note 61,13,409 7,84,726.00 20 2) 23 Note-1 24 CFAT 25 Present value factor 26 Present value of cash inflows 19,61,240 3.52 68,98,134.64 Note-2 Particulars Initial cost of investment ADD: Working capital Less: Salvage value at year 5 Less release of working cap at year 5 Amount 62,00,000 6,00,000 3,60,935 3,25,656 61,13,409 28 Calculation of PVAF 29 Period PVAF 0.88 0.88 0.78 1.67 0.69 2.36 0.61 2.97 0.54 3.52 5 25

E H A 37 b) Calculation of best case and worst case cash flows E9 Best Case: Includes increase in sale price by 10%, Reduction in intitial cost by 15%, Increase in salvage value by 15%, Decrease in working capital by 5%. 11 Calculation of revised CFAT Calculation of revised Present value of cash inflows Calculation of revised Present value of cash outflows 13 Particulars Amount Amount 14 Sales price (increased by 10%) 1,37,76,400 CFAT 28,68,424.00 52,70,000 15 Variable cost 88,35,000 PVAF 3.52 5,70,000 Particulars Initial cost of investment (reduced by 15%) ADD: Working capital (reduced by 5%) Less: Salvage value at year 5 (increased by 15%) Less release of working cap at year 5 Total 16 Contribution 49,41,400 Present value of cash inflows 1,00,88,911 4,15,076 3,09,373 51,15,551 17 Fixed Cost 18 Earning before depreciaiton and tax 19 Depreciation on reduced intitial cost во РВТ 51 Tax expense @ 24% 52 PAT 3 CFAT (PAT+Depreciation) 15,00,000 34,41,400 10,54,000 23,87,400 5,72,976 18,14,424.00 28,68,424.00 55 Calculation of Best NPV 7 Revised Present Value of Cash inflows 58 Revised Present Value of Cash outflows 59 Best Case NPV 1,00,88,911 51,15,551 49,73,359

52 Worst case: Includes decreased in sale price by 10%, Increase in intitial cost by 15%, Decrease in salvage value by 15%, Increase in working capital by 5%. 54 Calculation of revised CFAT Calculation of revised Present value of cash inflows Calculation of revised Present value of cash outflows 56 Particulars Amount Amount 57 Sales price (decreased by 10%) 1,12,71,600 CFAT 10,54,056.00 71,30,000 58 Variable cost 88,35,000 PVAF 3.52 6.30.000 Particulars Initial cost of investment (Increased by 15%) ADD: Working capital (Increased by 5%) Less: Salvage value at year 5 (decreased by 15%) Less release of working cap at year 5 Total 59 Contribution 24,36,600 Present value of cash inflows 37,07,359 3,06,795 3,41,939 71,11,266 -o Fixed Cost -1 Earning before depreciaiton and tax -2 Depreciation on increased intitial cost -3 PBT -4 Tax saving @ 24% -5 PAT -6 CFAT (PAT+Depreciation) -7 -8 Calculation of Best NPV 15,00,000 9,36,600 14,26,000 -4,89,400 -1,17,456 -3,71,944.00 10,54,056.00 Period 0.88 0.78 0.69 PVAF 0.88 1.67 2.36 2.97 3.52 0.61 0.54 BO Revised Present Value of Cash inflows 31 Revised Present Value of Cash outflows 32 Best Case NPV 37,07,359 71,11,266 -34,03,907