Scenario Analysis & NPV
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Here's the deal: I'm developing a project that will stock San Antonio with 40000 tons of machine screws every year for auto production. I'll need an initial 1,700,000 dollars in investment money for threading equipment just to get started. The project will last 5 years and the accounting department says that annual fixed costs will be 450,000 and that the variable costs should be $210 per ton. the initial fixed assets will be depreciated straight-line to zero over the 5 year project life. the salvage value of $500,000 is what's estimated after dismantling costs. Lastly, the marketing department estimates the automakers will let the contract at a price of $230 per ton. The engineering dept estimates that I will need a net working capital investment of $450,000. For that I require a 13% return and I also face a marginal tax rate of 38% on the project. HERE ARE THE 2 QUESTIONS:
A. - What is the estimated OCF for the project? The NPV? Should I pursue the project?
B. - If I think the accounting department's initial cost and salvage price projections are accurate only to within plus or minus 15%; the marketing dept estimate is only accurate to about plus or minus 10% and the engineering dept's net working capital estimate is accurate to about plus or minus 5%. What is my worst case scenario for my project? What is my best case? Do you think I should pursue this project?
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Solution Summary
The solution contains the comptation of net present value and the scenario analysis by varying the projections i.e.,the accounting department's initial cost and salvage price projections are accurate only to within plus or minus 15%; the marketing dept estimate is only accurate to about plus or minus 10% and the engineering dept's net working capital estimate is accurate to about plus or minus 5% and also computation of best case scenario and worst case scenario.
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