Consider a project to supply Detrolt with 27,000 tons of machine screws annually for automobile production. You will need an Initlal $5,000,000 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 $1,200,000 and that varlable costs should be $225 per ton; accounting wll depreclate the Initlal fixed asset Investment stralght-line to zero over the 5-year project life. It also estimates a salvage value of $575,000 after dismantling costs. The marketing department estimates that the automakers wll let the contract at a selling price of $332 per ton. The engineering department estimates you wll need an Initlal net working capltal Investment of $480,000. You require a return of 11 percent and face a tax rate of 22 percent on this project. a. Suppose you're confident about your own projections, but you're a Iittle unsure about Detrolt's actual machine screw requirement. What Is the sensitivity of the project OCF to changes In the quantity supplied? (Do not round Intermedlate calculatlons and round your answer to 2 decimal places, e.g., 32.16.) b. What Is the sensitivity of NPV to changes In quantity supplied? (Do not round Intermedlate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Given the sensitivity number you calculated, what Is the minimum level of output below which you wouldn't want to operate? (Do not round Intermedlate calculatlons and round your answer to the nearest whole number, e.g., 32)
Consider a project to supply Detrolt with 27,000 tons of machine screws annually for automobile production. You will need an Initlal $5,000,000 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 $1,200,000 and that varlable costs should be $225 per ton; accounting wll depreclate the Initlal fixed asset Investment stralght-line to zero over the 5-year project life. It also estimates a salvage value of $575,000 after dismantling costs. The marketing department estimates that the automakers wll let the contract at a selling price of $332 per ton. The engineering department estimates you wll need an Initlal net working capltal Investment of $480,000. You require a return of 11 percent and face a tax rate of 22 percent on this project. a. Suppose you're confident about your own projections, but you're a Iittle unsure about Detrolt's actual machine screw requirement. What Is the sensitivity of the project OCF to changes In the quantity supplied? (Do not round Intermedlate calculatlons and round your answer to 2 decimal places, e.g., 32.16.) b. What Is the sensitivity of NPV to changes In quantity supplied? (Do not round Intermedlate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Given the sensitivity number you calculated, what Is the minimum level of output below which you wouldn't want to operate? (Do not round Intermedlate calculatlons and round your answer to the nearest whole number, e.g., 32)
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1hM
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Transcribed Image Text:Consider a project to supply Detrolt with 27,000 tons of machine screws annually for
automobile production. You will need an Initlal $5,000,000 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 $1,200,000 and that varlable costs
should be $225 per ton; accounting wll depreclate the Initlal fixed asset Investment
stralght-line to zero over the 5-year project life. It also estimates a salvage value of
$575,000 after dismantling costs. The marketing department estimates that the
automakers will let the contract at a selling price of $332 per ton. The engineering
department estimates you will need an Initlal net working capital Investment of
$480,000. You require a return of 11 percent and face a tax rate of 22 percent on this
project.
a. Suppose you're confident about your own projections, but you're a little unsure about
Detrolt's actual machine screw requirement. What Is the sensitivity of the project OCF
to changes In the quantity supplled? (Do not round Intermedlate calculations and
round your enswer to 2 decimal places, e.g., 32.16.)
b. What Is the sensitivity of NPV to changes In quantity supplled? (Do not round
Intermedlete calculations and round your answer to 2 decimal places, e.g.., 32.16.)
c. Glven the sensitivity number you calculated, what Is the minimum level of output
below which you wouldn't want to operate? (Do not round Intermedlate calculations
and round your answer to the nearest whole number, e.g., 32)
a.
AOCF/AQ
b.
ANPVIAQ
Minimum level of output
C.
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Given values
VIEWStep 1: Calculate the Total operating cash flow (OCF) and Net present value (NPV) as follows:
VIEWStep 2: Calculate the Total OCF and NPV when quantity changes as follows:
VIEWStep 4: Calculate the sensitivity of the project OCF to changes in quantity as follows:
VIEWStep 5: Calculate the sensitivity of the project NPV to changes in quantity as follows:
VIEWStep 6: The minimum level of output is as follows:
VIEW
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