Consider a project to supply Detrolt with 26,000 tons of machine screws annually for automobile production. You will need an Initlal $5,900,000 Investment In threading equlpment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,425,000 and that varlable costs should be $270 per ton; accounting will depreclate the Initlal fixed asset Investment stralght-ine to zero over the 6-year project life. It also estimates a salvage value of $800,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $386 per ton. The engineering department estimates you will need an Initlal net working capltal Investment of $570,000. You require a return of 9 percent and face a tax rate of 21 percent on this project. a-1. What Is the estimated OCF for this project? (Do not round Intermedlate 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 Intermedlate calculations 2. and round your answer to 2 declmel places, e.g., 32.16.) b. Suppose you belleve that the accounting department's Initlal cost and salvage value projections are accurate only to within ±5 percent; the marketing department's price estimate Is accurate only to within ±15 percent; and the englneering department's net working capital estimate is accurate only to within ±10 percent. What are your worst- case and best-case NPVS for this project? (A negatlve answer should be Indlcated by a minus sign. Do not round Intermedlate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-1. OCF a-2. NPV Worst-case NPV -4,814,126.43 b. Best-case NPV %24
Consider a project to supply Detrolt with 26,000 tons of machine screws annually for automobile production. You will need an Initlal $5,900,000 Investment In threading equlpment to get the project started; the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1,425,000 and that varlable costs should be $270 per ton; accounting will depreclate the Initlal fixed asset Investment stralght-ine to zero over the 6-year project life. It also estimates a salvage value of $800,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $386 per ton. The engineering department estimates you will need an Initlal net working capltal Investment of $570,000. You require a return of 9 percent and face a tax rate of 21 percent on this project. a-1. What Is the estimated OCF for this project? (Do not round Intermedlate 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 Intermedlate calculations 2. and round your answer to 2 declmel places, e.g., 32.16.) b. Suppose you belleve that the accounting department's Initlal cost and salvage value projections are accurate only to within ±5 percent; the marketing department's price estimate Is accurate only to within ±15 percent; and the englneering department's net working capital estimate is accurate only to within ±10 percent. What are your worst- case and best-case NPVS for this project? (A negatlve answer should be Indlcated by a minus sign. Do not round Intermedlate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-1. OCF a-2. NPV Worst-case NPV -4,814,126.43 b. Best-case NPV %24
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider a project to supply Detrolt with 26,000 tons of machine screws annually for
automobile production. You will need an Initlal $5,900,000 Investment In threading
equlpment to get the project started; the project will last for 6 years. The accounting
department estimates that annual fixed costs will be $1,425,000 and that varlable costs
should be $270 per ton; accounting will depreclate the Initlal fixed asset Investment
stralght-Iline to zero over the 6-year project life. It also estimates a salvage value of
$800,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $386 per ton. The engineering
department estimates you will need an Initlal net working capltal Investment of
$570,000. You require a return of 9 percent and face a tax rate of 21 percent on this
project
a-1. What Is the estimated OCF for this project? (Do not round Intermedlate 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 Intermedlate calculations
2. and round your answer to 2 declmal places, e.g., 32.16.)
b. Suppose you belleve that the accounting department's Initlal cost and salvage value
projections are accurate only to within ±5 percent; the marketing department's price
estimate is accurate only to within ±15 percent; and the engineering department's net
working capital estimate is accurate only to within ±10 percent. What are your worst-
case and best-case NPVS for this project? (A negatlve answer should be Indlcated
by a minus sign. Do not round Intermedlate calculations and round your answers
to 2 decimal places, e.g., 32.16.)
a-1.
OCF
a-2. NPV
b.
Worst-case NPV
-4.814,126.43
Best-case NPV
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