company that is considering a project to supply a customer with 50,000 widgets annually. You will need an initial invest

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Company That Is Considering A Project To Supply A Customer With 50 000 Widgets Annually You Will Need An Initial Invest 1 (80.31 KiB) Viewed 26 times

company that is considering a project to supply a customer with 50,000 widgets annually. You will need an initial investment of $4,000,000 in new equipment to get the project started and you estimate that this project will remain active for five years. The Accounting Department estimated $1,000,000 in annual fixed costs and a variable costs of $200 per unit. Additionally, they told you they will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. Additionally, they are expecting a salvage value of $500,000 after dismantling costs. The Marketing Department is confident that they will be able to negotiate a contract with the customer to pay $300 per unit. Finally, the Engineering Department informed that they will need an initial net working capital investment of $350,000. You require a return of 15 percent and face a marginal tax rate of 40 percent on this project. 1. What are the OCF and the NPV for this project? Should you pursue it? OCF is $2,720,000 and NPV is $5,091,026. THis project should be pursued. 2. Suppose you believe that the initial cost and salvage value projections are accurate only to within #15 percent, the price estimate is accurate only to within +10 percent; and the net working capital estimate is accurate only to within +5 percent