Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $6,000,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,450,000 and that variable costs should be $275 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $825,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $392 per ton. The engineering department estimates you will need an initial net working capital investment of $580,000. You require a return of 11 percent and face a tax rate of 22 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- What is the estimated NPV for this project? (Do not round intermediate calculations 2. and round your answer to 2 decimal places, e.g., 32.16.) 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $6,000,000 investment in threading equipment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,450,000 and that variable costs should be $275 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $825,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $392 per ton. The engineering department estimates you will need an initial net working capital investment of $580,000. You require a return of 11 percent and face a tax rate of 22 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- What is the estimated NPV for this project? (Do not round intermediate calculations 2. and round your answer to 2 decimal places, e.g., 32.16.) 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...
Related questions
Question
![Consider a project to supply Detroit with 27,000 tons of machine screws annually for
automobile production. You will need an initial $6,000,000 investment in threading
equipment to get the project started; the project will last for 6 years. The accounting
department estimates that annual fixed costs will be $1,450,000 and that variable costs
should be $275 per ton; accounting will depreciate the initial fixed asset investment
straight-line to zero over the 6-year project life. It also estimates a salvage value of
$825,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $392 per ton. The engineering
department estimates you will need an initial net working capital investment of
$580,000. You require a return of 11 percent and face a tax rate of 22 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- What is the estimated NPV for this project? (Do not round intermediate calculations
2. and round your answer to 2 decimal places, e.g., 32.16.)
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? (A negative answer should be indicated
by a minus sign. Do not round intermediate calculations and round your answers
to 2 decimal places, e.g., 32.16.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F06e8d74c-fa5e-4ba5-8524-53581449a06d%2Fd840225f-7008-4233-a892-81349c3e86f4%2Flyvzqjb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Consider a project to supply Detroit with 27,000 tons of machine screws annually for
automobile production. You will need an initial $6,000,000 investment in threading
equipment to get the project started; the project will last for 6 years. The accounting
department estimates that annual fixed costs will be $1,450,000 and that variable costs
should be $275 per ton; accounting will depreciate the initial fixed asset investment
straight-line to zero over the 6-year project life. It also estimates a salvage value of
$825,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $392 per ton. The engineering
department estimates you will need an initial net working capital investment of
$580,000. You require a return of 11 percent and face a tax rate of 22 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- What is the estimated NPV for this project? (Do not round intermediate calculations
2. and round your answer to 2 decimal places, e.g., 32.16.)
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? (A negative answer should be indicated
by a minus sign. Do not round intermediate calculations and round your answers
to 2 decimal places, e.g., 32.16.)
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
![Managerial Accounting: The Cornerstone of Busines…](https://www.bartleby.com/isbn_cover_images/9781337115773/9781337115773_smallCoverImage.gif)
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning