Question: You Are Considering A Project That Will

You are considering a project that will supply an automobile production facility with 35,000 tonnes of machine screws annually for five years. To get the project started, you will need an initial $1,500,000 investment in threading equipment. The project will last for five years. The accounting department estimates that annual fixed costs will be $300,000 and that variable costs should be $200 per tonne. The CCA rate for treading equipment is 20%. Accounting estimates a salvage value of $500,000 after costs of dismantling. The marketing department estimates that the auto makers will accept the contract at a selling price of $230 per tonne. The engineering department estimates you will need an initial net working capital investment of $450,000. You require a 13% return and face a marginal tax rate of 38% on this project.

a. What is the NPV for this project? Should you pursue this project?

b. Suppose you believe that the accounting department’s initial cost and salvage projections are accurate only to within ±15%; the marketing department’s price estimate is accurate only to within ±10%; and the engineering department’s net working capital estimate is accurate only to within ±5%. What is your worst-case scenario for this project? Your best-case scenario?