33. You are evaluating the profitabil tv l of a process and have the f formation

Question

33. You are evaluating the profitabil tv l of a process and have the f formation. The criterion for profitability is a 15% rate of return over ten operating years. The equipment has zero salvage value at the end of the project Fixed capital investment (including land) in four installments (all values are in mil- lions of dollars as one transaction at the end of the year) Year 0 land Year 1 FCI installment1 Year 2 FCI installment 2 Year 3 FCI installment 3 Start-up capital at end of year 3 Positive cash flow years 4-13 ro salvage vaiu oi instalments $10 $20 520 $10 $25

Explanation / Answer

ANSWER: ALL NUMBERS ARE IN MILLION DOLLARS.

IN ORDER TO FIND THE PROFITIBABILITY POTENTIAL AT 15% THE PW IS POSITIVE OR NEGATIVE AND IF IT IS POSITIVE THEN THE PROJECTIVE WOULD BE PROFITABLE.

PW OF PROJECT = -10 - 20(P/F,15%,1) - 30(P/F,15%,2) -20(P/F,15%,3) - 10(P/F,15%,3) + 25(P/F,15%,4) +  25(P/F,15%,5) +  25(P/F,15%,6) +  25(P/F,15%,7) +  25(P/F,15%,8) +  25(P/F,15%,9) +  25(P/F,15%,10) +  25(P/F,15%,11) +  25(P/F,15%,12) +  25(P/F,15%,13)

SINCE 25 IS COMMON POSITIVE CASH FLOW FROM YEARS 4 TO 13 WE WILL TAKE IT COMMON AND ADD THE VALUES OF P/F FACTORS FROM YEAR 4 TO 13.

PW OF PROJECT = -10 - 20 * 0.8696 - 30 * .7561 - 20 * .6575 - 10 * .6575 + 25 ( .5718 + .4972 + .4323 + .3759 + .3269 + .2843 + .2472 + .2149 + .1869 + .1625)

PW OF PROJECT = -10 - 17.392 - 22.683 - 13.15 - 6.575 + 25 * 3.2999

PW OF PROJECT = -69.8 + 82.4975 = 12.6975

SINCE THE PW OF THE PROJECT IS POSITIVE , THEREFORE IT IS VIABLE AT 15%.

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