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Sensitivity Analysis Consider a project to supp...




Sensitivity Analysis Consider a project to supply Detroit with 55,000 tons of machine screws annually for automobile production. You will need an initial $1,700,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $520,000 and that variable costs should be $220 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $300,000 after dismantling costs. The market-ing department estimates that the automakers will let the contract at a selling price of $245 per ton. The engineering department estimates you will need an initial net working capital investment of $600,000. You require a 13 percent return and face a marginal tax rate of 38 percent on this project. Suppose you are confident about your own projections, but you are a little unsure about Detroit's actual machine screw requirements. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of net present value to changes in the quantity supplied? Given the sensitivity number you calculated, is there some minimum level of output below which you would't want to operate? Why?


Paper#8549 | Written in 18-Jul-2015

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