3:14 PM 165A - IA 4.pdf CHE 165A - Individual Assignment 4 Assigned September 14

Question

3:14 PM 165A - IA 4.pdf CHE 165A - Individual Assignment 4 Assigned September 14, 2018; Due September 21, 2018 (30 pts) In the design of a chemical plant, the following costs and revenues (in the third year of production) are projected: 1. Total depreciable capital, excluding allocated power $10,000,000 Allocated power utility Working capital Annual sales Annual cost of sales excluding depreciation S 2,000,000 S 500,000 S 8,000,000/yr S 1,500,000/yr Assume the costs of land, royalties, and startup are zero. Determine a.) The return on investment (ROI) b.) The payback period (PBP) c) The venture profit (assuming company-desired ROI is 20%)

Explanation / Answer

EBITDA = 8 - 1.5 - 2

= 8 -3.5

= 4.5 million $

Total invested capital = $10 + 0.5 mil

= $10.5 million

RoI = 4.5/10.5 = 42.86% --> this assumes no depreciation, for lack of information available.

If we assume 10 years depreciation of assets, then depreciation charge would be $1 million per year, reducing the profit to $3.5 million. In this case, ROI = 3.5/10.5 = 33.3%

Payback period would be amount of time required to recover cash investment made in the project. Company would recieve cash equivalent to $4.5 million from 3rd year onwards. Total investment for the project is $10.5 million including working capital. This investment will be recovered in 10.5/4.5 = 2.33 years. So payback period = 4.33 years (2 + 2.33 years)

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