Question

Problem 11-27 Scenario Analysis (LO2) (8 01:27:55 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.) b. 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 15 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.) a-1. OCF a-2. NPV b. Worst-case NPV Best-case NPV

Answer 1

fix =+N2*-0.2 G3 A В D E F Н К L М N O P Contribu Net Total cash Variable tion per Depreciati Operating working cash flows capital Sales Sale Depreciatio PVIF@ 1 Year Investment flows Fixed costs n Таx@24% |PАТ Present value on units price unit РВT 13% cost (6,800,000) 1.000 (6,800,000.00) 1,961,240 0.885 $1,735,610.62 1,961,240 0.783 $ 1,535,938.60 1,961,240 0.693 $1,359,237.70 1,961,240 0.613 $ 1,202,865.22 1,961,240 0.543 $1,064,482.50 (600,000) (6,200,000) 2 0 131,000 $ 404 $ 31,000 404 $ 3 31,000 $ 404$ 31,000 404 $ 5 31,000 $ 404$ 949,000 227,760 949,000 227,760 949,000 227,760 949,000 227,760 949,000 227,760 $ 3 285 119 1,500,000 1,240,000 721,240 1,240,000 1,961,240 721,240 1,240,000 721,240 1,240,000 721,240 1,240,000 721,240 1,240,000 $ 1,500,000 4 1,240,000 2 285 119 1,961,240 285 $ 5 119 1,500,000 1,240,000 1,961,240 $ 1,500,000 1,500,000 6 4 285 119 1,240,000 1,961,240 285 $ 7 119 1,240,000 1,961,240 600,000 665,000 $ 9 Net present value 98,134.64 $ 6,200,000 $ 6,200,000 10 Asset cost 11 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 $ $ 875,000 13 $875,000 $210,000 $665,000 15

fix -+N19*-0.2 G20 A В D E F Н K L N P Contribu Net Variable tion per Sales Depreciati Operating working cash flows capital Sale Total cash Depreciatio PVIF@ 18 Year Таx@24% Fixed costs n Investment flows Present value units price unit РBT РАT 13% cost on (7,760,000) 1.000 (7,760,000.00) 1,054,056 0.885 $ 1,054,056 0.783$ 1,054,056 0.693 $ 1,054,056 0.613 $ 1,054,056 0.543 $ (7,130,000) 19 (630,000) 0 131,000 $ 364 $ 31,000 364 $ 3 31,000 $ 364$ 31,000 364$ 5 31,000 $ 364$ (489,400) (117,456) (489,400) (117,456) (489,400) (117,456) (489,400) (117,456) (489,400) (117,456) (371,944) 1,426,000 (371,944) 1,426,000 (371,944) 1,426,000 (371,944) 1,426,000 (371,944) 1,426,000 20 $ 1,426,000 1,426,000 1,426,000 932,792.92 285 79 1,500,000 1,054,056 $ 1,500,000 21 1,054,056 825,480.46 2 285 79 285 $ 285 $ 285 $ 22 79 1,500,000 1,054,056 730,513.68 1,500,000 23 1,426,000 646,472.28 4 79 1,054,056 24 1,500,000 630,000 565,250 572,099.37 79 1,426,000 1,054,056 25 $(4,052,641.29) 26 Worst Net present value $ 7,130,000 $ 7,130,000 27 Asset cost 28 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 $ 29 $743,750 $743,750 $ 178,500 30 31 32 $565,250 33 O

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