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Consider a project to supply Detroit with 30000 tons of machine screws annually for automobile production You will need an initial 4000000 investment in threading equipment to get the project

Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,000,000 investment in threading equipment to get the project started; the project will last for three years. The accounting department estimates that annual fixed costs will be $700,000 and that variable costs should be $200 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $440,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $320 per ton. The engineering department estimates you will need an initial net working capital investment of $400,000. You require a return of 11 percent and face a marginal tax rate of 30 percent on this project.

Given the sensitivity number you calculated, is there some minimum level of output below which you wouldn’t want to operate?

 

Aug 29 2020 View more View Less

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