Delaware Chemicals is considering the installation of a computer process control

Question

Delaware Chemicals is considering the installation of a computer process control system in one of its processing plants. This plant is used about 40% of the time, or 3,500 operating hours per year, to produce a proprietary demulsification chemical; during the remaining 60% of the time, it is used to produce other specialty chemicals. The annual production of the demulsification chemical amounts to 30,000 kilograms per year, and it sells for $15 per kilogram. The proposed computer process control system will cost $65,000 and is expected to provide specific benefits in the production of the demulsification chemical as follows:

First, the selling price of the product could be increased by $2 per kilogram beacuse the product would be of higher purity, which translates into better demulsification performannce.

Second, production volumes would increase by 4,000 kilograms per year as a result of higher reaction yields, without any increase in requirements for raw material quantities or production time.

Finally, the number of process operators could be reduced by one per shift, which represents a savings of $25 per hour. The new control system would result in additional maintence costs of $53,000 per year and has an expected useful life of eight years.

While the system is likely to provide similar benefits in the production of the other specialty chemicals manufactured in the process plant, these have not been quantified as yet.

(a) Identify the cash inflows over the life of the project.

(b) Identify the cash outflows over the life of the project.

(c) Determine the net cash flows over the life of the project.

Explanation / Answer

(a) cash inflows over the life of the project

new production volume per year = 34000 kg

Increase in revenue per year = (17-15)*30000 + 17*4000 =128000

savings of labour cost per year = 3500*25 = 87500

Total cash inflows over the life of the project = 8*(87500 + 128000) = 1724000

(b) cash outflows over the life of the project

cost of computer process control system = 65000

additional maintence costs per year = 53000

total cash outflows over the life of the project = 53000*8 + 65000 = 489000

(c) net cash flows over the life of the project = inflows - outflows = 1724000 - 489000 = 1235000

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