Question

Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,200,000 investment in threading equipment to get the project started; the project will last for 4 years. The accounting department estimates that annual fixed costs will be $700,000 and that variable costs should be $190 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 4-year project life. It also estimates a salvage value of $350,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $310 per ton. The engineering department estimates you will need an initial net working capital investment of $320,000. You require a return of 13 percent and face a marginal tax rate of 22 percent on this project.

Required:
a. What is the estimated OCF for this project?
b. What is the estimated NPV for this project?

Answer 1

cash flow year 0 = -$3,200,00 - $320,000 = -$3,520,000

cash flow year 1 = [($2,400,000 - $700,000 - $800,000) x (1 - 22%)] + $800,000 = $1,502,000

cash flow year 2 = [($2,400,000 - $700,000 - $800,000) x (1 - 22%)] + $800,000 = $1,502,000

cash flow year 3 = [($2,400,000 - $700,000 - $800,000) x (1 - 22%)] + $800,000 = $1,502,000

cash flow year 4 = [($2,400,000 - $700,000 - $800,000) x (1 - 22%)] + $800,000 + [$350,000 x (1 - 22%)] + $320,000 = $2,095,000

NPV using a 13% discount rate = $1,311,354