Question

Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $4,500,000 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 $1,075,000 and that variable costs should be $200 per ton; accounting will depreciate the in itial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $450,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $302 per ton. The engineering department estimates you will need an initial net working capital investment of $430,000. You require a return of 11 percent and face a tax rate of 22 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 10 percent; the marketing department's price estimate is accurate only to within +5 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.) |а-1. ОCF $ 1,348,500 a-2. NPV $ 517,402.62 b. Worst-case NPV 994,728.03 Best-case NPV

Answer 1

value of machine - $ 4,500,000 depreciation = 4500000 5 years = $900, 000 per year depreciated entire value of asset to be paid on salvage value - since we Tax needed e salvage value after tax = 450000 [I - 0.22] = $ 351 000 - selling Less: variable price Cost per per ton = $300 ton = 200 i. Coniribution $ 102

a-1 calculation of operating cash flow = 2,550,000 Less: Total Contribution - 250000 102 Fixed expenditure depreciation = LOTS, 000 900 000 575,000 Less: Tax @ 221- 126500 ५५8500 Add: depreciation 900 000 I operating cash $ 1,348,500 flows a-2) calculation of NPV - N.P.V = cash out flows - Discounted Cash Inflows 1 Initial Investment = (2) Initial working capital = 4500 000 430 000 4930000 present value of Inflows including salvage value and working capital: required return = 11% - n = 5 years PVIFA (r=111. n=5) = 3.6959 present value factor (8=111, n=5)=0.5935

NOTE: working of in capital requirements project becomes o hence Cash Inflows at the it is end added Cash Inflows = 1348500x 3.6959 + [351000 + 430000780.5935 4983921-15 + 463593.5 = $ 5,447, 444.65 Nip. v = 5,441, 444.65 - 4930000 = $511, 444.65 worst case Nop.v Initial Cost increases to 10% = 4,500,000 + 10%. = 4,950,000 in depreciation = 4950000 = $990000 salvage value decreases by 10% = 450000 - 10% = 405,000 after tan= yosooo (1-0.22] = $315900 i salvage value

working capital requirements increases by Ist = 430,000 +15). = 494500 - selling price decreases by 5% i sales price = 300 - 5% = 286-9 i contribution = 286.9-200 - 86.9 calculation of operating cash flow :- Total Contribution - 25000 X 86.9 2112500 less: 1075 000 Fixed Costs depreciation 990000 1075oo less: Tax @ 22.1 23650 Hold depreciation 83,850 990000 1073850 N.P.V. out flow = 4950000 tu94500 5444500 -

discounted Cash In flows = 1073850 x 3.6959 + (315900 + 494.500] x 0.5935 = 3968842.215 + 480972-4 = 4449814.615 N.p.v. 4, 449,814.615 - 5,444,500 - – 994,685-39 Best Case Mpv :- Initial Cost decreases by 10% = 4,500,000 -10% = 4,050,000 depreciation = 4050000 = 810000 5 salvage value increases by 10% = 450,000 + 10./. = 495000 .: salvage value after tax = 495000 (1-0.22] - 386100

working capital decreases by 1st. - 430000 -15% = 365,500 Increases by st selling price .:sales price = 302 + 5% = 314.1 contribution = 317.1- 200 = 1171 operating cash flow :- calculating Total Contribution = 25000 X117.1 = 2927, 500 Less: Fixed Costs lot5000 depreciation 810 000 1042 500 less Tax @ 22% 229350 operating cash flow [813 150 +810000] C1,623,150] depreciation Total out How = 4,050,000 + 365,500 = 4415500 discounted inflows = (1, 623, 150 x 3.6959 + [386100+ 365,500780.5930 = 5,999,000 + 446,074.6 = 6,445,074-6 N.P.V :- N.P.V= 6,445,074 6-4,415, soo Best Case N.p.r= 2,029,514.6