Consider a project to supply Detroit with 28,000 tons of machine
screws annually for automobile production....
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Consider a project to supply Detroit with 28,000 tons of machinescrews annually for automobile production. You will need an initial$4,800,000 investment in threading equipment to get the projectstarted; the project will last for 5 years. The accountingdepartment estimates that annual fixed costs will be $1,150,000 andthat variable costs should be $215 per ton; accounting willdepreciate the initial fixed asset investment straight-line to zeroover the 5-year project life. It also estimates a salvage value of$525,000 after dismantling costs. The marketing departmentestimates that the automakers will let the contract at a sellingprice of $320 per ton. The engineering department estimates youwill need an initial net working capital investment of $460,000.You require a return of 14 percent and face a tax rate of 25percent on this project.
Calculate the accounting, cash, and financial break-evenquantities. (Do not round intermediate calculations andround your answers to the nearest whole number, e.g.,32.)
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AnswerLet us calculate cash flows and NPVContribution per ton 320 215 105Total annual fixed costs 1150000 960000 2110000Cash fixed cost 1150000A Accounting breakeven quantity Fixed
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