Question

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You company wants to build a new small plant that will cost $90,000,000 to construct. You...

You company wants to build a new small plant that will cost $90,000,000 to construct. You will

pay the construction engineering firm $45,000,000 today and another $45,000,000 at the end of the first year of construction. The plant will be finished 24 months from the start of construction. Each year of operation, the plant will take charges of $5,000,000 per year at the beginning of the year for raw materials, labor, and maintenance. Each year of operation, the plant will take credits of $20,000,000 in sales revenues at the end of the year. If the company requires a MARR of 15% and the plant is expected to have a life of 15 years of production, answer the following questions:

a. What is the simple Payback Period for this project ignoring the effects of time value of money? b. What is the NPV of this project using the MARR? c. What is the Discounted Payback Period of this project using the MARR? d. What is the IRR for this project?

Solutions

Expert Solution

Net profit per year at the time of production=20000000-5000000=$15,000,000

Below is the cash flow

Year Cash Flow Cumulative Cash flow
0 -45000000 -45000000
1 -45000000 -90000000
2 0 -90000000
3 15000000 -75000000
4 15000000 -60000000
5 15000000 -45000000
6 15000000 -30000000
7 15000000 -15000000
8 15000000 0
9 15000000 15000000
10 15000000 30000000
11 15000000 45000000
12 15000000 60000000
13 15000000 75000000
14 15000000 90000000
15 15000000 105000000
16 15000000 120000000
17 15000000 135000000

Hence, we can see the total cost will will be recovered at the end of 8 year ignoring time value.

b. Below is the cash flow in present value using MARR

Year Cash Flow Present Value (Cash Flow/1.15^year) Cumulative Present Value
0     (45,000,000.0)                            (45,000,000.0)                       (45,000,000.0)
1     (45,000,000.0)                            (39,130,434.8)                       (84,130,434.8)
2                          -                                                   -                         (84,130,434.8)
3       15,000,000.0                                9,862,743.5                       (74,267,691.3)
4       15,000,000.0                                8,576,298.7                       (65,691,392.6)
5       15,000,000.0                                7,457,651.0                       (58,233,741.6)
6       15,000,000.0                                6,484,913.9                       (51,748,827.6)
7       15,000,000.0                                5,639,055.6                       (46,109,772.0)
8       15,000,000.0                                4,903,526.6                       (41,206,245.4)
9       15,000,000.0                                4,263,936.2                       (36,942,309.3)
10       15,000,000.0                                3,707,770.6                       (33,234,538.7)
11       15,000,000.0                                3,224,148.3                       (30,010,390.3)
12       15,000,000.0                                2,803,607.3                       (27,206,783.1)
13       15,000,000.0                                2,437,919.4                       (24,768,863.7)
14       15,000,000.0                                2,119,929.9                       (22,648,933.9)
15       15,000,000.0                                1,843,417.3                       (20,805,516.6)
16       15,000,000.0                                1,602,971.5                       (19,202,545.0)
17       15,000,000.0                                1,393,888.3                       (17,808,656.7)

Hence, NPV of the project is -$17808656.7

c. The project does not have discounted payback period as the it's is not getting recovered throughout it's life using time value.

d.

Hence, IRR of the project is 11.34%

jeff jeffy answered 3 months ago
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