Reference no: EM132755221

Question - Consider a project to supply Thunder Bay with 45,000 tons of machine screws annually for automobile production. You will need an initial $5,200,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $850,000 and that variable costs should be $190 per ton. Assume that depreciation is straight line to zero over the life of the project. The marketing department estimates a selling price of $350 per ton. Assume that there is no net working capital required. You require a 13% return and face a marginal tax rate of 35% on this project.

Required -

a) What is the estimated OCF for this project? What is the estimated NPV for this project?

b) Suppose you believe that the accounting department's projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±15%. What is your worst-case and best-case scenario for this project? Do you still want to pursue the project?