Explore BrainMass
Share

# Operating cash flow and npv

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Consider a project to supply a company with 50,000 tons of widgets annually for production. You will need an initial \$1,750,000 investment in 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 makers will accept 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 percent return and face a marginal tax rate of 39% on this project.

a. what is the ocf and npv for this project?

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

so i started with this but am not 1005 with my calculations:

OCF=[(\$price/unit-v.c.)(unit sales)-fixed costs](.61)+.39(costs/8yrs)=
(1,750,000/9,000,000) (50,000)-450,000] (.61)+ .39(costs/8)=

i know that npv=costs-ocf(pvifa) , but im really confused on how to calculate the amount for each and where to go from that point.

the same problem with these numbers:

36,000 tons of widgets annually
You will need an initial \$1,440,000 investment in equipment to get the project started, the project will last for 6 years.
The accounting department estimates that annual fixed costs will be \$288,000 and that variable costs should be \$120 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 of \$313,000 after dismantling costs. The marketing department estimates that the automakers will accept the contract at a selling price of \$140 per ton. The engineering department estimates you will need an initial net working capital investment of \$259,000. You require a 11% return & face a marginal tax rate of 34 percent on this project.

a. what is the ocf and npv?
b. Suppose you believe that the accounting department's initial cost and salvage value projections are accurate only to within +/-15%, the marketing department's price estimate is accurate only to within +/-12%, & the engineering department's net working capital estimate is accurate only to within +/-9%. Your worst-case NPV for this project is \$____& your best-case NPV is \$____.