What is the estimated OCF for this project

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Reference no: EM131079351

Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,600,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $600,000 and that variable costs should be $250 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-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 $340 per ton. The engineering department estimates you will need an initial net working capital investment of $560,000. You require a return of 14 percent and face a marginal tax rate of 30 percent on this project.

a-1 What is the estimated OCF for this project?

a-2 What is the estimated NPV for this project?

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 are your worst-case and best-case NPVs for this project?

Reference no: EM131079351

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