Question: Company X uses fermentation to produce a valuable industrial chemical. A startup company approaches X...

Question: Company X uses fermentation to produce a valuable industrial chemical. A startup company approaches X with a novel microbe that will increase the yield of the chemical, so that profits will increase by an estimated $14.0k/mo. The startup company wishes to sell the rights to use the microbe for a seven-year period, at a price of $480k.

Engineers at company X estimate the increased production will entail additional maintenance, costing $12.0k in year 2, $14.0k in year 4, and $17.0k in year 6 of the project.

1. What would a cash flow diagram of the project, from the standpoint of Company X?

2. How can I calculate the present value of the project, assuming a 13.0% annual interest rate?

3. Using Excel, make a well-formatted graph of the project present value vs. interest rate, for interest rates ranging from 0 to 30% APR.

Solutions

Expert Solution

1. Here, the additional maintenance cost is spread throughout the year. For eg., $12,000 in year-2 is spread across 12 months of year 2 at $1,000 per month

Month	Net-cashflows
0	-480,000
1	14000
2	14000
3	14000
4	14000
5	14000
6	14000
7	14000
8	14000
9	14000
10	14000
11	14000
12	14000
13	13000
14	13000
15	13000
16	13000
17	13000
18	13000
19	13000
20	13000
21	13000
22	13000
23	13000
24	13000
25	14000
26	14000
27	14000
28	14000
29	14000
30	14000
31	14000
32	14000
33	14000
34	14000
35	14000
36	14000
37	12833.33333
38	12833.33333
39	12833.33333
40	12833.33333
41	12833.33333
42	12833.33333
43	12833.33333
44	12833.33333
45	12833.33333
46	12833.33333
47	12833.33333
48	12833.33333
49	14000
50	14000
51	14000
52	14000
53	14000
54	14000
55	14000
56	14000
57	14000
58	14000
59	14000
60	14000
61	12583.33333
62	12583.33333
63	12583.33333
64	12583.33333
65	12583.33333
66	12583.33333
67	12583.33333
68	12583.33333
69	12583.33333
70	12583.33333
71	12583.33333
72	12583.33333
73	14000
74	14000
75	14000
76	14000
77	14000
78	14000
79	14000
80	14000
81	14000
82	14000
83	14000
84	14000

Year	Yearly cash-flows
0	-480,000
1	168000
2	156000
3	168000
4	154000
5	168000
6	151000
7	168000

We use the NPV function in excel

Discount rate = 13%/12 ( Since there are 12 periods per year and 13% is the annual interest rate.

We get the Net Present Value of the project = $276,561.0098

3. We calculate the NPV for different annual interest rates

Annual APR	NPV
0%	667000
1%	627913.5744
2%	590641.8359
3%	555089.1215
4%	521165.1996
5%	488784.9465
6%	457868.0411
7%	428338.6801
8%	400125.3096
9%	373160.3743
10%	347380.0814
11%	322724.1789
12%	299135.7485
13%	276561.0098
14%	254949.1375
15%	234252.0893
16%	214424.4441
17%	195423.2505
18%	177207.8841
19%	159739.9133
20%	142982.9737
21%	126902.6492
22%	111466.3613
23%	96643.26432
24%	82404.14675
25%	68721.33897
26%	55568.62618
27%	42921.16651
28%	30755.41396
29%	19049.04597
30%	7780.895112

jeff jeffy answered 1 year ago

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