A scoping study was recently conducted by senior ChE students on the feasibility

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 according to the following schedule:

Year

Capital Cost

-3

-2

-1

0

($83 million)

($250 million)

($250 million)

($370 million)

The following annual costs (in millions) were estimated for the project:

Annual cost

Raw materials

Labor

Maintenance

Utilities

$9,700

$0.89

$57

$24

The annual revenue is predicted 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 schedule. Please use a federal tax rate of 35% and state tax rate of 1%.

If the company’s MARR is 18%, determine the after tax NPV and after tax RoR.

Conduct sensitivity analyses to determine the magnitude of the economic hazards (choose several variables) associated with this project.

Please show all work

Year

Capital Cost

-3

-2

-1

0

($83 million)

($250 million)

($250 million)

($370 million)

Explanation / Answer

Yearly Profit Million $ Sales                12,000 Less:- Cost Raw Material                   9,700 Labor                           1 Maint                         57 Utilities                         24 Total Cost                   9,782 Profit                   2,218 Project Cost = $ 83+ $250+$250 + $370= $ 953 Million 10-year Depreciation 1 10         95.30 2 18      171.54 3 14.4      137.23 4 11.52      109.79 5 9.22         87.87 6 7.37         70.24 7 6.55         62.42 8 6.55         62.42 9 6.56         62.52 10 6.55         62.42 11 3.28         31.26 Calculation of NPV Year Intial Out flow Profit Tax Saving on Dep Tax on Profit @35% State Tax @ 1% Net Cash Flow Discount Factor @ 18% NPV -3 -83             -83           1.64     -136.37 -2 -250           -250           1.39     -348.10 -1 -250           -250 1.18     -295.00 0 -370           -370 1     -370.00 1         2,218         33.36 -776 -120         1,355         0.847 1,148.41 2         2,218         60.04 -776 -120         1,382         0.718      992.39 3         2,218         48.03 -776 -120         1,370         0.609      833.70 4         2,218         38.42 -776 -120         1,360         0.516      701.57 5         2,218         30.75 -776 -120         1,353         0.437      591.20 6         2,218         24.58 -776 -120         1,346         0.370      498.73 7         2,218         21.85 -776 -120         1,344         0.314      421.80 8         2,218         21.85 -776 -120         1,344         0.266      357.45 9         2,218         21.88 -776 -120         1,344         0.225      302.93 10         2,218         21.85 -776 -120         1,344         0.191      256.72 11         2,218         10.94 -776 -120         1,333         0.162      215.79 12         2,218 -776 -120         1,322         0.137      181.37 13         2,218 -776 -120         1,322         0.116      153.71 14         2,218 -776 -120         1,322         0.099      130.26 15         2,218 -776 -120         1,322         0.084      110.39 16         2,218 -776 -120         1,322         0.071         93.55 17         2,218 -776 -120         1,322         0.060         79.28 18         2,218 -776 -120         1,322         0.051         67.19 19         2,218 -776 -120         1,322         0.043         56.94 20         2,218 -776 -120         1,322         0.037         48.25 6,092.17

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