Answer Happy

The SSC Company is considering making a bid to supply the
highway department with rock salt to drop on roads in the county
during winter. The contract will guarantee a minimum of 50,000 tons
in each year, but the actual quantity may be above that amount if
conditions warrant. Management believes that the actual quantity
will average 80,000 tons per year. The firm will need an initial
$1,600,000 investment in processing equipment to get the project
started. The contract will last for five years and is not expected
to be renewed. The accounting department has estimated that annual
fixed costs will be $500,000 and that variable costs should be
about $45 per ton of the final product. The new equipment will be
depreciated using MACRS with a class life of five years. At the end
of the project, it is estimated that the equipment could be sold
for $ 150,000. The marketing department estimates that the State
will grant the contract a selling price of $60 per ton, though it
may get some lower bids if the contract is opened for competitive
bidding. The engineering department estimates that the project will
need an initial net working capital investment of $115,000. The
firm’s WACC is 10%, and the marginal tax rate is 35%
5. Create a scenario summary of the NPV using the following information: Variable Worst Case Base Case Best Case Tons of rock salt 50,000 80,000 95,000 Variable cost per ton $55 $45 $35 Salvage value of Equipment $70,000 $150,000 $200,000 Assume that the probabilities are 25%, 50%, and 25% for the Worst Case, the Base Case, and the Best Case, respectively. Calculate the expected NPV, the standard deviation of the expected NPV, and the probability of a negative NPV. Is the project acceptable? 6. Perform a Monte Carlo Simulation with 1,000 trials to determine the expected NPV and the standard deviation of the expected NPV. The uncertain variables and their probability distributions are given below. The quantity of rock salt sold should be simulated for each year independently of the others (i.e., it is five separate variables). Variable Distribution Tons of rock salt in each year Triangular with a min of 50,000, most likely of 80,000, and maximum of 95,000. Variable cost per ton Normal with a mean of $45 and a standard deviation of $3. Salvage value of equipment Uniform with a min of $70,000 and a max of $200,000. 7. Create a histogram showing the probability distribution of NPV. 8. Using the output of the simulation, what is the probability that the NPV will be less than or equal to zero? Would you suggest that the project be accepted?