Consider a project to supply Detroit with 27,000 tons of machinescrews annually for automobile production. You will need an initial$6,000,000 investment in threading equipment to get the projectstarted; the project will last for 6 years. The accountingdepartment estimates that annual fixed costs will be $1,450,000 andthat variable costs should be $275 per ton; accounting willdepreciate the initial fixed asset investment straight-line to zeroover the 6-year project life. It also estimates a salvage value of$825,000 after dismantling costs. The marketing departmentestimates that the automakers will let the contract at a sellingprice of $392 per ton. The engineering department estimates youwill need an initial net working capital investment of $580,000.You require a return of 11 percent and face a tax rate of 22percent on this project. a-1. What is the estimated OCF for thisproject? (Do not round intermediate calculations and round youranswer to the nearest whole number, e.g., 32.) a-2. What is theestimated NPV for this project? (Do not round intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.) b. Suppose you believe that the accounting department’sinitial cost and salvage value projections are accurate only towithin ±15 percent; the marketing department’s price estimate isaccurate only to within ±10 percent; and the engineeringdepartment’s net working capital estimate is accurate only towithin ±5 percent. What are your worst-case and best-case NPVs forthis project?
