Question

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,600,000 investment in threading equipment to get the project started; the project will last for 3 years. The accounting department estimates that annual fixed costs will be $750,000 and that variable costs should be $410 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 3-year project life. It also estimates a salvage value of $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $550 per ton. The engineering department estimates you will need an initial net working capital investment of $460,000. You require a return of 12 percent and face a marginal tax rate of 24 percent on this project.

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.)

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 ±10 percent; and the engineering department’s net working capital estimate is accurate only to within ±5 percent. What is the worst-case NPV for this project? The best-case NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

What is the estimated NPV for this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

Sale Contribut Variabl ion per e cost unit costs Sales unitsprice Fixed Depreciatio n Depreciatio Operating cash flows Year PBT Tax@24% PAT Net working Total cash PVIF@12 capital Investment flows Present value (460,000) (4,600,000) (5,060,000) 1.000 $ (5,060,000.00) 2,990,000 0.893 $ 2,669,642.86 2,990,000 0.797 $ 2,383,609.69 460,000 304,000 3,754,000 0.712 $ 2,672,023.05 130,000 $ 550 $ 410 $ 2 30,000 $ 550 $ 410 $ 3 30,000 $ 550 $ 410 $ 140 | 750,000 140 750,000 140 750,000 1,533,333 | 1,916,667 1,533,333 1,916,667 1,533,333 1,916,667 460,000 1,456,667 460,000 1,456,667 460,000 1,456,667 1,533,333 1,533,333 1,533,333 2,990,000 2,990,000 2,990,000 Net present value $ 2,665,275.60 $4,600,000 $4,600,000 Asset cost Less: Depreciation charged WDV of machine at the time of sale Sale value of machine Profit/(Loss) on sale Less:Tax@24% After tax cash flows from sale of asset $ 400,000 $ 400,000 $ 96,000 $ 304,000 Sales units Sale price Contribut Variabl ion per Fixed e cost unit costs Depreciatio Year PBT Tax@24% PAT Net Depreciatio Operating working Total cash PVIF@12 cash flows capital Investment flows Present value (483,000)| (5,290,000) (5,773,000)| 1.000 $ (5,773,000.00) 1,763,333 1,791,200 1,791,200 0.893 $ 1,599,285.71 1,763,333 1,791,200 1,791,200 0.797 $ 1,427,933.67 1,763,333 1,791,200 483,000 258,400 2,532,600 0.712 $ 1,802,654.66 1 30,000 2 30,000 3 30,000 $ 495 $ 410 $ $ 495 $ 410 $ $ 495 $ 410 $ 85 85 85 750,000 | 1,763,333 750,000 1,763,333 750,000 1,763,333 36,667 36,667 36,667 8,800 8,800 8,800 27,867 27,867 27,867 Worst Net present value $ (943,125.96) Asset cost $ 5,290,000 Less: Depreciation charged $5,290,000 WDV of machine at the time of sale Sale value of machine $ 340,000 Profit/(Loss) on sale $ 340,000 Less:Tax@24% $ 81,600 After tax cash flows from sale of asset $ 258,400

Sales units Sale price Contribut Variabl ion per e cost unit costs Fixed Depreciatio n Depreciatio Operating cash flows Year PBT Tax@24% PAT Net working Total cash PVIF@12 capital Investment flows Present value (437,000) (3,910,000) (4,347,000) 4,188,800 0.893 $ 3,740,000.00 4,188,800 0.797 $ 3,339,285.71 437,000 349,600 4,975,400 0.712 $ 3,541,391.44 1 30,000 $ 605 $ 410 $ 2 30,000 $ 605 $ 410 $ 3 30,000 $ 605 $ 410 $ 195 195 195 750,000 750,000 750,000 1,303,333 1,303,333 1,303,333 3,796,667 3,796,667 3,796,667 911,200 911,200 911,200 2,885,467 2,885,467 2,885,467 1,303,333 1,303,333 1,303,333 4,188,800 4,188,800 4,188,800 | | | Best Net present value $ 6,273,677.16 Asset cost $3,910,000 Less: Depreciation charged $3,910,000 WDV of machine at the time of sale $ Sale value of machine $ 460,000 Profit/(Loss) on sale $ 460,000 Less:Tax@24% $ 110,400 After tax cash flows from sale of asset $ 349,600 a-1) Operating cash flows $2,990,000.00 a-2) Estimated NPV $2,665,275.60 b) Worst-case NPV Best-case NPV -$943,125.96 $6,273,677.16

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