Question

Profitability Analysis
(Reference: Peters, Timmerhaus, West in Plant Design and Economics for Chemical Engineers 5^th Ed.)

Problem 8 – 8

In the design of a chemical plant, the following expenditures and revenues are estimated after the plant has achieved its desired production rate:

• Total Capital Investment $ 10, 000, 000
• Working Capital $ 1, 000, 000
• Annual Sales $ 8, 000, 000 / yr.
• Annual Expenditures $ 2, 000, 000 / yr.

Assuming straight-line depreciation over a 10 – year project analysis period and with MACRS depreciation for 8 – yr. class life.

Develop a spreadsheet (similar to that in the Cost and Evaluation template) and calculate over an estimated life of 10 years. determine

1. The return on the investment after taxes
2. The payback period

pg. 354 (Peters, Timmerhaus, West in Plant Design and Economics for Chemical Engineers 5^th Ed.)

Answer 1

	A	B	C	D=A+B+C	E=D*27.5%	G	F=D-E-C+G			Cost of Asset	1,00,00,000
Year	Cash from Revenue in ($)	Cash Outflow (in $)	Depreciation	Taxable Income	Tax @27.5%	Working Capital	After tax CF			Year	Rate	Depreciation
Year 0		-1,00,00,000				-10,00,000	-1,10,00,000			Year 1	14.29%	14,29,000
Year 1	80,00,000	-20,00,000	-14,29,000	45,71,000	12,57,025		47,42,975			Year 2	24.49%	24,49,000
Year 2	80,00,000	-20,00,000	-24,49,000	35,51,000	9,76,525		50,23,475			Year 3	17.49%	17,49,000
Year 3	80,00,000	-20,00,000	-17,49,000	42,51,000	11,69,025		48,30,975			Year 4	12.49%	12,49,000
Year 4	80,00,000	-20,00,000	-12,49,000	47,51,000	13,06,525		46,93,475			Year 5	8.93%	8,93,000
Year 5	80,00,000	-20,00,000	-8,93,000	51,07,000	14,04,425		45,95,575			Year 6	8.92%	8,92,000
Year 6	80,00,000	-20,00,000	-8,92,000	51,08,000	14,04,700		45,95,300			Year 7	8.93%	8,93,000
Year 7	80,00,000	-20,00,000	-8,93,000	51,07,000	14,04,425		45,95,575			Year 8	4.46%	4,46,000
Year 8	80,00,000	-20,00,000	-4,46,000	55,54,000	15,27,350		44,72,650
Year 9	80,00,000	-20,00,000		60,00,000	16,50,000		43,50,000
Year 10	80,00,000	-20,00,000		60,00,000	16,50,000	10,00,000	53,50,000
						Total returns	4,72,50,000	Sum of F from year 1 to 10
						Payback period	2.26	(2+[11000000-4742975-5023475]/4830975

Note: Tax rate is not given, hence assumed 27.5% for calculation purposes.

Payback period is the time period till which investment is recovered, therefore investment is recovered till 2.26 years.

Please Upvote and Support!!