Question

Consider a project to supply Detroit with 31,000 tons of machine screws annually for automobile production. You will need an initial $6,200,000 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 $1,500,000 and that variable costs should be $285 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 5-year project life. It also estimates a salvage value of $875,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $404 per ton. The engineering department estimates you will need an initial net working capital investment of $600,000. You require a return of 13 percent and face a tax rate of 24 percent on this project. |

a. |
Suppose you’re confident about your own projections, but you’re
a little unsure about Detroit’s actual machine screw requirement.
What is the sensitivity of the project OCF to changes in the
quantity supplied? |

b. |
What is the sensitivity of NPV to changes in quantity supplied?
(Do not round intermediate 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 intermediate calculations and round your
answer to the nearest whole number, e.g., 32) |

Answer #1

Consider a project to supply Detroit with 28,000 tons of machine
screws annually for automobile production. You will need an initial
$6,100,000 investment in threading equipment to get the project
started; the project will last for 6 years. The accounting
department estimates that annual fixed costs will be $1,475,000 and
that variable costs should be $280 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 6-year project life. It also estimates a salvage value...

Consider a project to supply Detroit with 28,000 tons of machine
screws annually for automobile production. You will need an initial
$5,100,000 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 $1,225,000 and
that variable costs should be $230 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 5-year project life. It also estimates a salvage value...

Consider a project to supply Detroit with 25,000 tons of machine
screws annually for automobile production. You will need an initial
$4,500,000 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 $1,075,000 and
that variable costs should be $200 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 5-year project life. It also estimates a salvage value...

Consider a project to supply Detroit with 27,000 tons of machine
screws annually for automobile production. You will need an initial
$4,700,000 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 $1,125,000 and
that variable costs should be $210 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 5-year project life. It also estimates a salvage value...

Consider a project to supply Detroit with 27,000 tons of machine
screws annually for automobile production. You will need an initial
$6,000,000 investment in threading equipment to get the project
started; the project will last for 6 years. The accounting
department estimates that annual fixed costs will be $1,450,000 and
that variable costs should be $275 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 6-year project life. It also estimates a salvage value...

Please show work:
Consider a project to
supply Detroit with 27,000 tons of machine screws annually for
automobile production. You will need an initial $5,600,000
investment in threading equipment to get the project started; the
project will last for 6 years. The accounting department estimates
that annual fixed costs will be $1,350,000 and that variable costs
should be $255 per ton; accounting will depreciate the initial
fixed asset investment straight-line to zero over the 6-year
project life. It also estimates...

Consider a project to supply Detroit with 30,000 tons of machine
screws annually for automobile production. You will need an initial
$4,000,000 investment in threading equipment to get the project
started; the project will last for 3 years. The accounting
department estimates that annual fixed costs will be $700,000 and
that variable costs should be $200 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 3-year project life. It also estimates a salvage value...

Consider a project to supply Detroit with 20,000 tons of machine
screws annually for automobile production. You will need an initial
$2,800,000 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 $750,000 and
that variable costs should be $260 per ton; accounting will
depreciate the initial fixed asset investment straight-line to zero
over the 5-year project life. It also estimates a salvage value...

If we consider the effect of taxes, then the degree of operating
leverage can be written as: DOL = 1 + [FC × (1 – TC) – TC × D]/OCF
Consider a project to supply Detroit with 25,000 tons of machine
screws annually for automobile production. You will need an initial
$4,900,000 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 $1,175,000 and...

If we consider the effect of taxes, then the degree of operating
leverage can be written as: DOL = 1 + [FC × (1 – TC) – TC × D] /
OCF Consider a project to supply Detroit with 30,000 tons of
machine screws annually for automobile production. You will need an
initial $4,000,000 investment in threading equipment to get the
project started; the project will last for three years. The
accounting department estimates that annual fixed costs will be...

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