# Calculating OCF/NPV of Projects

I'm very confused on how to calculate this problem. The formula I have is for OCF:

OCF= (P-V) (Q-FC) (1-t) + t (D) I'm not sure what to plug in here and from there I'm missing the formula for NPV. Please help me.

A project aims to supply Detroit with 50,000 tons of machine screws annually for automobile production. You will need an initial $1,750,000 investment in threading equipment to get the project started; the project will last for 8 years. The accounting department estimates that annual fixed costs will be $450,000 and that variable costs should be $180 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 8-year project life. It also estimates a salvage value of $513,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $200 per ton. The engineering department estimates you will need an initial net working capital investment of $450,000. You require a 12 % return and face a marginal tax rate of 39 % on this project. (Round answers to 2 decimal places.)

a. The estimated OCF for this project is $_______ and the NPV is $_______ .

b. Suppose you believe that the accounting department's initial cost and salvage value projections are accurate only to within +/-14 percent; the marketing department's price estimate is accurate only to within +/-9 percent; and the engineering department's net working capital estimate is accurate only to within +/-3 percent. Your worst-case NPV for this project is $______ and your best-case NPV is $______.

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#### Solution Preview

OCF = Operating Cash Flow

I believe the formula for OCF is: OCF= ((P-VC)*Q-FC) (1-t) + t (D))

(You provided OCF= (P-V) (Q-FC) (1-t) + t (D))

The formula reads: amount making per unit (P-VC) times the number of units (Q) less the fixed costs. Tax is then accounted for. Note the t(D) calculation is simply adding the tax benefit of depreciation

P = price = $200 per ton

VC = Variable Costs = $180 per ton

Q = Quantity = 50,000 ...

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