question 2

  

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,600,000 investment in threading equipment to get the project started; the project will last for three years. The accounting department estimates that annual fixed costs will be $750,000 and that variable costs should be $420 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $550 per ton. The engineering department estimates you will need an initial net working capital investment of $460,000. You require a return of 17 percent and face a marginal tax rate of 30 percent on this project.

a-1

What is the estimated OCF for this project? (Do not round intermediate calculations.)

  
 

  OCF $   

  
 

a-2

What is the estimated NPV for this project? (Do not round intermediate calculations. 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 the worst-case NPV for this project? The best-case NPV? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

  
 

   
  Worst-case $   
  Best-case  $