U.S. Steel is considering a plant expansion to produce austenitic, precipitation
ID: 2814725 • Letter: U
Question
U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel round bars that is expected to cost $16 million now and another $10 million 1 year from now. If total operating costs will be $1.4 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 11 to recover its investment plus a return of 19% per year? The company must make $ 3.570 million annually in years 1 through 11 to recover its investment plus a return of 19% per year.
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Explanation / Answer
US Steel Year 0 1 2 3 4 5 6 7 8 9 10 11 Revenue 6.84 6.84 6.84 6.84 6.84 6.84 6.84 6.84 6.84 6.84 6.84 Operating Costs 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 Initial Cost 16 10 Total Costs 16.00 11.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 Discount Factor 1.000 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 PV of Costs 16.00 9.58 0.99 0.83 0.70 0.59 0.49 0.41 0.35 0.29 0.25 0.21 Total PV of Costs 30.68 Sum of DF 4.486 Required revenue per year 6.839 CF -16.00 -4.560713 5.439287184 5.439287 5.439287 5.439287 5.439287 5.439287 5.439287 5.439287 5.439287 5.439287 IRR 19.00% So Required Revenue 6.839 annually
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