CBase M Gmail CH 11 Question 6 (of 6) value 10.00 points Consider a project to s

Question

CBase M Gmail CH 11 Question 6 (of 6) value 10.00 points Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,000,000 investment in threading equipment to get the project start will last for four years. The accounting department estimates that annual fixed costs that variable costs should be $450 per ton; accounting will depreciate the initial fixed asset investment straight-ine to zero over the four-year project life. It also dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $600 per ton. The engineering department estimates you will need an initial net working capital investment of $300,000. You require a 18 percent return and face a marginal tax rate of 38 percent on this project ed; the project will be $850,000 and estimates a salvage value of $280,000 after a-1 What is the estimated OCF for this project? OCF $1618000 a-2 What is the estimated NPV for this project? (Round your answer to 2 decimal places. (e.g,, 32.16) NPV 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 ±5 percent. What is your worst-case and best-case scenario for this project? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g. 32.16) Worst-case Best-case SC F3 F4 F5 F6 F7 F8 )

Explanation / Answer

1)

depreciation = 3000000 / 4 = 750000

OCF = (1-38%)*(20000*(600-450) - 850000) + 38%*750000 = 1618000

2)

CF0 = -3000000 -300000 = -3300000

Terminal value = 300000 + (1-38%)*280000 = 473600

CF1,2,3 = OCF = 1618000

CF4 = OCF + Terminal value = 1618000 + 473600 = 2091600

NPV = -3300000 + NPV(18%,1618000,1618000,1618000,2091600)

   = 1296797.61

3)

Worst case

CF0 = -3000000*(1+15%) -300000*(1+5%) = -3765000

Terminal value = 300000*(1+5%) + (1-38%)*280000*(1-15%) = 462560

depreciation = 3000000*(1+15%) / 4 = 862500

OCF = (1-38%)*(20000*(600*(1-10%)-450) - 850000) + 38%*862500 = 916750

CF1,2,3 = OCF = 916750

CF4 = OCF + Terminal value = 916750 + 462560 = 1379310

NPV = -3765000+ NPV(18%,916750,916750,916750,1379310)

= -1060302.54

Best case

CF0 = -3000000*(1-15%) -300000*(1-5%) = -2835000

Terminal value = 300000*(1-5%) + (1-38%)*280000*(1+15%) = 484640

depreciation = 3000000*(1-15%) / 4 = 637500

OCF = (1-38%)*(20000*(600*(1+10%)-450) - 850000) + 38%*637500= 2319250

CF1,2,3 = OCF = 2319250

CF4 = OCF + Terminal value = 2319250 + 484640 = 2803890

NPV = -2835000+ NPV(18%,2319250,2319250,2319250,2803890)

= 3653897.76

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