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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

2.

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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