Question

Chapter 11 Problemsi Saved 10 Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $5,000,000 investment in threading equipment to get the project started, the project Will last for 5 years. The accounting department estimates that annual fixed costs willl be $1,200,000 and that variable costs should be $225 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 $575,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $332 per ton. The engineering department estimates you will need an initial net working capital investment of $480,000. You require a return of 11 percent and face a tax rate of 22 percent on this project 10 points eBook a. Suppose you're confident about your own projections, but you're a little unsure about Detroit's actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? (Do not round Intermedlate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What Is the sensitivity of NPV to changes in quantity supplied? (Do not round Intermedlate calculations and round your answer to 2 declmal places, e.g., 32.16.) c. Given the sensitivity number you calculated, what is the minimum level of output below which you wouldn't want to operate? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32) Print References a. AOCFIAQ 5.42 b. ΔΝPV/ΔQ Minimum level of output C.

Answer 1

C D E F G H I J K Intitial investment Machine cost Working capital Total 5000000 480000 5480000 Terminal cash flow Salvage value Working capital Total 448500 480000 928500 10.00% Sales units Sale price Variable cost per unit Revenue Variable cost Fixed cost Depreciation Taxable profit Tax Net profit Add: dep Operating cash flow Actual Change Change% 27000 29700 332 332 225 225 8964000 9860400 -6075000 -6682500 - 1200000 -1200000 -1000000 1000000 689000 977900 - 151580 -215138 537420 762762 1000000 1000000 1537420 1762762 1 Sensitivity is the measure of impact on the final output due to change in one variable factor 14.66% 19 Sensitivity of OCF to Units 1.47 20 a) 21 Sensitivity of 1.47 means change in one unit of the units will change the OCF by 1.47$ 23 b) 753165.55 1586006.38 NPV Sensitivity of OCF to NPV 110.58% 11.06 Sensitivity of 11.06 means change in one unit of the units will change the NPV by 11.06 $ 27 C) % decrease in units Minimum level of output -9.04% 24558 The minimum level of output will be such that the NPV is equal to zero.

H Intitial investment Machine cost Working capital Total =5000000 480000 =SUM(C2:03) Terminal cash flow Salvage value Working capital Total =575000*(1-22%) 480000 =SUM(14:15) Change% 7 Change =C7*(1+E7) 0.1 332 10 11 Sales units Sale price Variable cost per unit Revenue Variable cost Fixed cost Depreciation Taxable profit Actual 27000 332 225 =C8*C7 --C9*C7 - 1200000 --$C$2/5 =SUM(C10:C13) --C14*22% =SUM(C14:015) --C13 =SUM(C16:017) 14 225 =D8 D7 --D9*D7 - 1200000 --$C$2/5 =SUM(D10:D13) --D14.22% =SUM(D14:015) =-D13 -SUM(D16:017) 1 Sensitivity is the measure of impact on the final output due to change in one variable factor 15 Tax 16 17 18 Net profit Add: dep Operating cash flow =(D18-C18)/C18 19 20 a) Sensitivity of OCF to Units =E18/E7 21 Sensitivity of 1.47 means change in one unit of the units will change the OCF by 1.47$ 22 =PV(11%,5,-C18,-$1$6)-$C$4 =PV(11%,5,-D18,-$1$6)-$C$4 23 b) NPV 24 Sensitivity of OCF to NPV 25 =(D23-C23)/C23 =E23/E7 Sensitivity of 11.06 means change in one unit of the units will change the NPV by 11.06 $ 26 27 ) % decrease in units 28 Minimum level of output -- 100%/E24 =C7*(1+E27) The minimum level of output will be such that the NPV is equal to zero. 29