Reference no: EM13393951

Dayton Metal Corporation (DMC), a medium-sized manufacturer of fabricated metal parts, is considering whether to enter the competition to become a supplier of transmission housings for Dayton Power & Light (DP&L).  To compete, DMC must design a new fixture for the production process and purchase a new forge, which would cost $125,000.  If DMC wins the competition, it may be able to sell as many as 2,000 units per year to DP&L for $50 each; variable production costs, such as direct labor and direct material costs, are estimated to be $15 per unit.  Fixed costs are estimated to be $10,000 per year.  DMC expects that the proposed project will have a life of about 5 years.  The initial investment can be depreciated on a MACRS basis over a 7-year period, and the marginal income tax rate is 40%.  At the end of 5 years, the forge is expected to have a market value equal to 32% of its original cost.  Based on this information, the engineering and marketing departments at DMC have prepared the cash flow estimates shown in the table on the next page.

Tasks

Provide your responses to the following three items in a Word document to be submitted electronically through Isidore.  Additionally, please submit the Excel file used to generate the spiderplot and tornado diagram.

a) Assuming a MARR of 15%, determine the net present worth (NPW) of the project.

b) Perform a sensitivity analysis which includes the following variables:  unit price, demand, variable cost, fixed costs, and salvage value. Vary each variable by +50% in 5% increments.  Develop both a spiderplot and a tornado diagram' copy and paste the respective plots into the Word document. 

c) For each of the five variables, determine whether the NPW is very sensitive, fairly sensitive, or relatively insensitive to changes.  Discuss the results and the impact on DMC's decision to pursue the project.

After-Tax Cash Flow

	YR0	YR1	YR2	YR3	YR4	YR5
Revenues
Unit price		50	50	50	50	50
Demand (units)		2,000	2,000	2,000	2,000	2,000
Sales revenue		100,000	100,000	100,000	100,000	100,000
Expenses
Unit variable cost		15	15	15	15	15
Variable cost		30,000	30,000	30,000	30,000	30,000
Fixed cost		10,000	10,000	10,000	10,000	10,000
Depreciation		17,863	30,613	21,863	15,613	5,575
Taxable income		42,137	29,387	38,137	44,387	54,425
Income taxes (40%)		16,855	11,755	15,255	17,755	21,770
Net income		25,282	17,632	22,632	26,632	32,655
Cash Flow Statement
Operating activities
Net income		25,282	17,632	22,632	26,632	32,655
Depreciation		17,863	30,613	21,863	15,613	5,575
Investment activities
Investment	(125,000)
Salvage						40,000
Gains tax						(2,611)
Net cash flow	(125,000)	43,145	48,245	44,745	42,245	75,619