A process to produce 2000 ton/ year of pyruvic acid requires a total capital inv

Question

A process to produce 2000 ton/ year of pyruvic acid requires a total capital investment of $ 30 million (working capital of $ 3 million). Fixed operating costs are $ 1 million/ year and the the variable operating costs (excluding raw materials) is expected to be $ 0.5/kg product. The yield of the product per ton of raw material is 80%. The tax rate is 35%. Calculate the selling price (in $/kg) which gives a minimum ROI after tax of 35%. Assume straight line depreciation. The project life is 10 years.

Explanation / Answer

produce 2000 tons investment 30 Million $ wc 3 Million $ net investment in fixed assets 27 Million $ operating Fixed Cost 1 Million $ Variable cost 0.5 $ per kg yield of the product per ton of Raw material 80.00% tax rate 35.00% SP? ?????? ROI after tax 35.00% life 10 years Depreciation = $27 million / 10 years 2.7 Million $ Required return= 35% of 30mil $ 10.5 Million $ Variable cost excluding RM 0.5 per kg 0.5 per kg raw materials Yield = 80% of RM 2000 tons = 80% of RM RM= 2000/80% RM= 2500 TONS 2500 TONS = 2267962 Kg particulars Million $ sales 23.9878271538 2000 TONS - raw materials 3 Note 1 - VC 1.133981 (2267962*$0.5/Kg) contribution 19.8538461538 - Fixed cost 1 (given) EBITDA 18.8538461538 -DA 2.7 (from above) EBIT 16.1538461538 100.00% -interest 0 EBT 16.1538461538 100.00% -taxes 5.6538461538 35.00% PAT 10.5 65.00% Calculations : sales 23.98782715 Million $ tons 2000 tons or 1814369 Kg selling price (in $/kg)= 23.98782715 million $ /1814369 kg) selling price (in $/kg)= 0.000013221 Million $ answer 0.000013221 Million $ Note 1 : working capital = CA-CL assume Current liability ( CL) = 0 CA= working capital working capital includes RM , inventory etc so, working capital =Raw materials Assumption 2 : working capital is also an investment as it could have earned something , if invested otherwise

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