a scoping study was recently conducted by senior ChE students on the feasibility
ID: 2761956 • Letter: A
Question
a scoping study was recently conducted by senior ChE students on the feasibility of constructing an oil refinery in Houston, Texas to process West Texas Crude. The students determined that the construction of the facility will take 4 years. The capital costs will therefore be spread amongst these acccording to the following schedule:
The following annual costs (in millions were estimated for the project:
The annual revenue is predicited to be $12,000 million and the project is expected to last for 20 years with no expected salvage value. The capital equipment will be depreciated using the 10 year MACRS scedule. Please use a federal tax rate of 35% and a state tax rate of 1%.
A) if the companys MARR is 18%, determine the after tax NPV and after tax RoR.
B) Conduct sensitivity analysis to determine the magnitude of the econmic hazards (choose several variables) associated with this project.
Please do not use Excel.
Year Capital Cost -3 $83 million -2 $250 million -1 $250 million 0 $370 millionExplanation / Answer
A)The present value of the capital costs as of t=0,
=$ 83*(1.18)^3+250*(1.18)^2+250 *(1.18)^1+370 *(1.18)^0 million
=$ 1149.472 million
Therefore the net investment as of t=0 is=Investment=$ 1149.472 million
Annual cost=$ 9700+0.89+57+24 million=$ 9781.89 million
Tax rate =1-(1-.35)(1-.01)=35.65%=0.3565
cash flow per year from Revenue=(Annual Revenue-Annual cost)*(1-TaxRate)
cash flow per year from Revenue=$ (12,000-9781.89)*(1-0.3565) million
cash flow per year from Revenue=$ 1427.3538 million
Present value of cash flows from project in the future from years 1-11 for 11 years
=$1468.33/1.18^1+1501.12/1.18^2+1486.36/1.18^3+1474.38/1.18^4+1465.14/1.18^5+1457.56/1.18^6+1454.19/1.18^7+1454.19/1.18^8+1454.24/1.18^9+1454.19/1.18^10+1440.79/1.18^11 million
=$ 6850.274 million
Present value of cash flows from project in the future from years 12-20 for 9 years
=(1427.3538/0.18)*(1-1/(1.18)^9)*(1/1.18^11)
=$ 994.496 million
Net Present value of cash flows from project in the future from years 0-20 ,
=$ -1149.472+6850.274+994.496 million
=$ 6695.30 million
Let the ROR be r,
therefore,Net Present value of cash flows from project in the future from years 0-20=0=NPV@RoR
=> NPV@RoR=$ -1149.472+ 1468.33/(1+r)^1+1501.12/(1+r)^2+1486.36/(1+r)^3+1474.38/(1+r)^4+1465.14/(1+r)^5+1457.56/(1+r)^6+1454.19/(1+r)^7+1454.19/(1+r)^8+1454.24/(1+r)^9+1454.19/(1+r)^10+1440.79/(1+r)^11 +(1427.3538/r)*(1-1/((1+r))^9)*(1/(1+r)^11) million=0,Use formula for NPV as given NPV=-1149.472+ 1468.33/(1+r)^1+1501.12/(1+r)^2+1486.36/(1+r)^3+1474.38/(1+r)^4+1465.14/(1+r)^5+1457.56/(1+r)^6+1454.19/(1+r)^7+1454.19/(1+r)^8+1454.24/(1+r)^9+1454.19/(1+r)^10+1440.79/(1+r)^11 +(1427.3538/r)*(1-1/((1+r))^9)*(1/(1+r)^11) and calculate the NPV values for different rate of returns r and find the corresponding NPV values till the NPV becomes 0 using calculator.The r at which NPV=0 is the RoR.
Therefore the The RoR=128.61%, after tax RoR=(1-0.3565)*128.61%=82.76%
B)Due to economic hazards the Annual Revenue and Annual cost can go unfavorably for the project.
Scenario:Annual Revenue=$11,000 million ,Net Annual cost=$ 10500 million
Annual cost decreases to $ 10500 million which also eradicated the cash flows form the tax savings from depreciation,here we consider cost after considering the tax savings.Or we consider tax savings to be 0 as they are evaporated due to economic hazards.
Then
cash flow per year from Revenue=(Annual Revenue-Annual cost)*(1-TaxRate)
cash flow per year from Revenue=$ (11,000 -10500)*(1-0.3565) million
cash flow per year from Revenue=$ 321.75 million
Net cash flow/yr = cash flow per year from Revenue=$ 321.75 million (since tax savings=0)
Therefore the Present value of cash flows from project in the future from years 0-20,
=$ -1149.472 +(321.75/0.18)*(1-1/(1.18)^20) million
=$572.77 million
therefore the magnitude of the economic hazards
=change in the NPV of the project due to the economic hazards
=$ 6695.30 million -$572.77 million
=$ 6122.53 million
Tax Rate 35.65% Investment(BV0) $ 1,149.47 Year MACRS rate Depreceiation cash flow /year Tax savings Net cash flow/yr rate D=rate*BV0 from Revenue,CF1 from Depcn(TS) CF=CF1+TS 1 10% $ 114.95 1427.3538 $ 40.98 $ 1,468.33 2 18% $ 206.90 1427.3538 $ 73.76 $ 1,501.12 3 14.40% $ 165.52 1427.3538 $ 59.01 $ 1,486.36 4 11.52% $ 132.42 1427.3538 $ 47.21 $ 1,474.56 5 9.22% $ 105.98 1427.3538 $ 37.78 $ 1,465.14 6 7.37% $ 84.72 1427.3538 $ 30.20 $ 1,457.56 7 6.55% $ 75.29 1427.3538 $ 26.84 $ 1,454.19 8 6.55% $ 75.29 1427.3538 $ 26.84 $ 1,454.19 9 6.56% $ 75.41 1427.3538 $ 26.88 $ 1,454.24 10 6.55% $ 75.29 1427.3538 $ 26.84 $ 1,454.19 11 3.28% $ 37.70 1427.3538 $ 13.44 $ 1,440.79Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.