(Scenario Analysis II) Consider a project to supply Detroit with 25,000 tons of machine screws annually for

automobile production. You need an initial 2,700,000 dollars investment in threading equipment to get the project started; the project will last for 5 years. The accounting department estimates that annual fixed cost will be 275,000 dollars and that variable cost should be $265 per ton; accounting will depreciate the initial fixed asset investment straightline to zero over the 5 year project life. It also estimates a salvage value of $250,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $345 per ton. The engineering department estimates you will need an initial net working capital investment of $400,000. You require a 13% return and face a marginal tax rate of 38% on this project.

• What is the estimated OCF of this project? The NPV? Should you pursue this project?

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 +/- 10%; and the engineering department’s net capital estimate accurate only to within +/- 5%. What is the worst case scenario for this project? Your best-case scenario? Do you still want to pursue this project?

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