3. (a) A new chemicals manufacturing project has been proposed in the United Sta

Question

3. (a) A new chemicals manufacturing project has been proposed in the United States and its economic viability must be evaluated. Construct a detailed cash flow table for five years of plant operation. (15 marks) (b) (i) If the target rate of return for this project is 20%, show that the project is not profitable after just five years of operation. (5 marks) (ii) How many more years of operation would be necessary for the plant to become profitable? (5 marks) DATA Capital cost Plant capacity Construction time Raw materials cost Raw material cost escalation Other operating costs Income Market size US$90 million 100 000 ty 2 y 500 USS t' currently 3% y-1 300 USS t' 1 200 USS t 50000 ty currently 10000 tyly Market growth rate

Explanation / Answer

$ 000S

YEAR 0

YEAR 1

YEAR 2

YEAR 3

YEAR 4

YEAR 5

YEAR 6

a

CASH OUTFLOWS

AVERAGE PLANT COST

-45000

-45000

DM COST

500

515

530

546

OTHER OP COSTS

300

300

300

300

CASH INFLOWS

INCOME

1200

1440

1680

1920

PROFIT before depreciation

+400

+625

+850

+1074

DEP

-18000

-18000

-18000

-18000

b i

AFTER 5 YEARS IT WOULD BE PROFITABLE, AS PLANT COST WIPED OFF

b ii

6th year it would be profitable

$ 000S

YEAR 0

YEAR 1

YEAR 2

YEAR 3

YEAR 4

YEAR 5

YEAR 6

a

CASH OUTFLOWS

AVERAGE PLANT COST

-45000

-45000

DM COST

500

515

530

546

OTHER OP COSTS

300

300

300

300

CASH INFLOWS

INCOME

1200

1440

1680

1920

PROFIT before depreciation

+400

+625

+850

+1074

DEP

-18000

-18000

-18000

-18000

b i

AFTER 5 YEARS IT WOULD BE PROFITABLE, AS PLANT COST WIPED OFF

b ii

6th year it would be profitable

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