Consider a project to supply Detroit with 23,000 tons of machine screws annually for automobile production. You will need an initial $4,400,000 investment in threading equipment to get the project started; the project will last for 5 years. The accounting department estimates that annual fixed costs will be $1,050,000 and that variable costs should be $195 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $425,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $296 per ton. The engineering department estimates you will need an initial net working capital investment of $420,000. 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 intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a- 2. What is the estimated NPV for this project? (Do not round intermediate calculations 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 ±10 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 15 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.) a-1. OCF a-2. NPV b. Worst-case NPV b. Best-case NPV
Consider a project to supply Detroit with 23,000 tons of machine screws annually for automobile production. You will need an initial $4,400,000 investment in threading equipment to get the project started; the project will last for 5 years. The accounting department estimates that annual fixed costs will be $1,050,000 and that variable costs should be $195 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $425,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $296 per ton. The engineering department estimates you will need an initial net working capital investment of $420,000. 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 intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a- 2. What is the estimated NPV for this project? (Do not round intermediate calculations 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 ±10 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 15 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.) a-1. OCF a-2. NPV b. Worst-case NPV b. Best-case NPV
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...
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Transcribed Image Text:Consider a project to supply Detroit with 23,000 tons of machine screws annually for
automobile production. You will need an initial $4,400,000 investment in threading
equipment to get the project started; the project will last for 5 years. The accounting
department estimates that annual fixed costs will be $1,050,000 and that variable costs
should be $195 per ton; accounting will depreciate the initial fixed asset investment
straight-line to zero over the 5-year project life. It also estimates a salvage value of
$425,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $296 per ton. The engineering
department estimates you will need an initial net working capital investment of
$420,000. 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 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 +10 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 15 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.)
a-1. OCF
a-2. NPV
b. Worst-case NPV
b. Best-case NPV
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