Question

Problem 2

A proposed process (see table below) has a lifetime of 10 years and a total fixed capital investment of $60 million (to be committed in equal parts over years 0 and 1). Just prior to startup (end of year 1), a working capital of $25 million is required. Projected annual revenues and operating expenses yield an annual pre-tax cash flow of $50 million, however the plant is projected to operate at 50% capacity in year 2. The 5-year MACRS depreciation schedule will be used for this project. The interest rate (cost of capital) is 13%, and the corporate income tax rate is 21%.

(a) Calculate the simple payback time and the pre-tax return on investment

(b) Complete the values missing in the table.

(c) What is the IRR of this project?

a b Year Capital Investment (MM) Working Capital (MM$) Pre-Tax Cash Flow (MM$) 5-year MACRS Schedule (%) Depreciation Charge (MM$) Taxable Income (MM$) Taxes Due (MM$) After Tax Cash Flow (MM$) Present Value of Cash Flow (MM$) Net Present Value (NPV, MM$)

Answer 1

Capital Working Year Investment Capital (MMS) (MM) -30 -301 -25 Pre-Tax Cash Flow (MM) 5-Year MACRS Schedule (%) Net Present IRR of Value the (NPV, MM$) Project 50 50 50 50 Present Taxable Taxes After Tax Cost of Value of Depreciation Income Due Cash Flow Capital Cashflow Charge (MM) (MM) (MM) (MM$) (13%) (MMS) -30 -30.0000 -55 0.8849558 -48.6726 12 13 2 .73 22.27 0.7831467 17.4407 19.2 30.8 6.468 43.532 0.6930502 30.1699 11.52 38.48 8.0808 41.9192 0.6133187|| 25.7098 6.912) 43.088 9.04848 40.95152 0.5427599 22.2268 6.912 43.088 9.048480 40.95152 0.4803185|| 19.6698 3.456 46.544 9.77424 40.22576 0.4250606 17.0984 10.5 39.5 0.3761599 14.8583 50 10.5 39.5 0.3328848 13.1490 50 10.5 39.5 0.2945883 11.6362 93.2863 20% 32% 19.20% 11.52% 11.52% 5.76% 0.00% 0.00% 0.00% 20% 50 50

a) Simple Payback time Opening Closing Year Amount Cash Flow Amount 0 -30 -30 -301 -55 -85 -85 22.27 -62.73 -62.73 43.532 -19.198 4. -19.198 41.9192 Simple Payback time = 3 years +19.198/41.9192 = 3 years +0.4579763 years = 3.458 years = 3 years 167 days Pretax Return on Investment = Total Pre tax inflow Total Outflow = 365/85 = 4.294 b) Fill out value in the below table - Please find the above values in the table C) IRR of this project = 20%