1) Let a project to provide Detroit with 55,000 tons of machine screws annually for automobile production. You will require the initial $1,700,000 investment in threading equipment to get project started; project will last for 5 years. Accounting department evaluated that annual fixed costs will be $520,000 and that variable costs must be $220 per ton; accounting will decline the initial fixed asset investment straight-line to zero over 5-year project life. It also evaluates the salvage value of $300,000 after dismantling costs. Marketing department evaluates that automakers will let contract at a selling price of= $245 per ton. Engineering department evaluates you will require the initial net working capital investment of= $600,000. You need a 13% return and face marginal tax rate of= 38% on this project.
Assume you are confident about your own projections, but you are little uncertain about Detroit's actual machine screw requirements.
Find out the sensitivity of project OCF to changes in quantity supplied?
What about the sensitivity of net present value to changes in the quantity supplied?
Given sensitivity number you computed, is there some minimum level of output below which you wouldn't desire to operate? describe why?
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