Dayton Metal Corporation (DMC), a medium-sized manufacturer of fabricated metal parts, is considering whether to enter the competition to become a supplier of transmission housings for Dayton Power & Light (DP&L). To compete, DMC must design a new fixture for the production process and purchase a new forge, which would cost $125,000. If DMC wins the competition, it may be able to sell as many as 2,000 units per year to DP&L for $50 each; variable production costs, such as direct labor and direct material costs, are estimated to be $15 per unit. Fixed costs are estimated to be $10,000 per year. DMC expects that the proposed project will have a life of about 5 years. The initial investment can be depreciated on a MACRS basis over a 7-year period, and the marginal income tax rate is 40%. At the end of 5 years, the forge is expected to have a market value equal to 32% of its original cost. Based on this information, the engineering and marketing departments at DMC have prepared the cash flow estimates shown in the table on the next page.
Tasks
Provide your responses to the following three items in a Word document to be submitted electronically through Isidore. Additionally, please submit the Excel file used to generate the spiderplot and tornado diagram.
a) Assuming a MARR of 15%, determine the net present worth (NPW) of the project.
b) Perform a sensitivity analysis which includes the following variables: unit price, demand, variable cost, fixed costs, and salvage value. Vary each variable by +50% in 5% increments. Develop both a spiderplot and a tornado diagram' copy and paste the respective plots into the Word document.
c) For each of the five variables, determine whether the NPW is very sensitive, fairly sensitive, or relatively insensitive to changes. Discuss the results and the impact on DMC's decision to pursue the project.
After-Tax Cash Flow
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YR0
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YR1
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YR2
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YR3
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YR4
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YR5
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Revenues
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Unit price
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50
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50
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50
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50
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50
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Demand (units)
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2,000
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2,000
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2,000
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2,000
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2,000
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|
Sales revenue
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100,000
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100,000
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100,000
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100,000
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100,000
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|
Expenses
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|
|
|
|
|
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Unit variable cost
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15
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15
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15
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15
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15
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Variable cost
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30,000
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30,000
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30,000
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30,000
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30,000
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Fixed cost
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10,000
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10,000
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10,000
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10,000
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10,000
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Depreciation
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17,863
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30,613
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21,863
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15,613
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5,575
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Taxable income
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42,137
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29,387
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38,137
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44,387
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54,425
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|
Income taxes (40%)
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16,855
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11,755
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15,255
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17,755
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21,770
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Net income
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25,282
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17,632
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22,632
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26,632
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32,655
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Cash Flow Statement
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Operating activities
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Net income
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25,282
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17,632
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22,632
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26,632
|
32,655
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|
Depreciation
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|
17,863
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30,613
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21,863
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15,613
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5,575
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Investment activities
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|
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Investment
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(125,000)
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|
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Salvage
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40,000
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Gains tax
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(2,611)
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Net cash flow
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(125,000)
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43,145
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48,245
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44,745
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42,245
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75,619
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