Question

Make sure the answers are correct, well written, clear, and easy to understand. Thanks.

Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,600,000 investment in threading equipment to get the project started; the project will last for 4 years. The accounting department estimates that annual fixed costs will be $850,000 and that variable costs should be $240 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 4-year project life. It also estimates a salvage value of $250,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $380 per ton. The engineering department estimates you will need an initial networking capital investment of $360,000. You require a return of 11 percent and face a marginal 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-2 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.) 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 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.)

Answer 1

A (1) Calculation of Operating Cash Flow

Depreciation = $ 3600000 / 4 = $ 900000

Particulars	Calculation	Amount ($)
Sales	20000 ton * $ 380 per ton	7600000
Less - Variable cost	20000*240	4800000
Fixed cost		850000
Depreciation		900000
profit before tax		1050000
Less - tax @ 24%		252000
profit after tax		798000
Add - Depreciation		900000
Less - increase in working capital		360000
Operating cash flow		1338000

Operating cash flow =  Net Income + Non-Cash Expenses – Increase in Working Capital

A. (2) Calculation of Estimated NPV

for calculating the NPV we use CFAT ( cash flow after tax + Deprecation)

CFAT = 798000+900000 = 1698000

Salvage value = 250000 - 24% = $ 190000

initial investment = 3600000 + 360000 = 3960000

(Amount in dollar)      

Year	PVF @ 11%	Cash flow	Present value
0	1.00	-3960000	-3960000.0
1	0.9009	1698000	1529728.2
2	0.8116	1698000	1378096.8
3	0.7312	1698000	1241577.6
4	0.6587	1698000	1118472.6
4	0.6587	190000 ( salvage)	125153.0
4	0.6587	360000 (working capital)	237132.0
		NPV	$ 1673160.2

B. Best case NPV and worst case NPV after terms changed

Particulars	at plus (+)	at minus (-)
project cost (15%)	4140000	3060000
Salvage value (15%)	287500	212500
price change (10%)	$ 418	$ 342
net working capital (5%)	378000	342000

At plus terms

Particulars	Calculation	Amount ($)
Sales	20000 ton * $ 418 per ton	8360000
Less - Variable cost	20000*240	4800000
Fixed cost		850000
Depreciation		1035000
profit before tax		1675000
Less - tax @ 24%		402000
profit after tax		1273000
Add - Depreciation		1035000
CFAT		2308000

NPV

Salvage value = 287500 - 24% = $ 218500

initial investment = 4140000 + 378000= 4518000

(Amount in dollar)      

Year	PVF @ 11%	Cash flow	Present value
0	1.00	-4518000	-4518000.0
1	0.9009	2308000	2079277.2
2	0.8116	2308000	1873172.8
3	0.7312	2308000	1687609.6
4	0.6587	2308000	1520279.6
4	0.6587	218500( salvage)	143925.9
4	0.6587	378000 (working capital)	248988.6
		NPV	$ 3041358.1

At minus terms

Particulars	Calculation	Amount ($)
Sales	20000 ton * $ 342 per ton	6840000
Less - Variable cost	20000*240	4800000
Fixed cost		850000
Depreciation		765000
profit before tax		425000
Less - tax @ 24%		102000
profit after tax		323000
Add - Depreciation		765000
CFAT		1088000

Salvage value = 212500 - 24% = $ 161500

initial investment = 3060000 + 342000 = 3402000

(Amount in dollar)      

Year	PVF @ 11%	Cash flow	Present value
0	1.00	-3402000	-3402000.0
1	0.9009	1088000	980179.2
2	0.8116	1088000	883020.8
3	0.7312	1088000	795545.6
4	0.6587	1088000	716665.6
4	0.6587	161500( salvage)	106380.05
4	0.6587	342000 (working capital)	225275.4
		NPV	$ 305066.65

best case NAV = $ 3041358.1

worst case NAV = $ 305066.65