Question

U.S. Steel

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 $12 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 9 to recover its investment plus a return of 23% per year? The company must make $ O m illion annually in years 1 through 9 to recover its investment plus a return of 23% per year.

Answer 1

Suppose the company has to make x million per year.

Since interest rate is not provided we will ignore the time cost of money.

The total investment or cost on the project is 10+12+1.4x9=34.6 million

To have an ROI of 23%, the revenue should be 34.6x1.23=42.558 million

Now, diving it by 9, we get 4.72867 million

So, it has to make $4.72867 million annually to recover all investment and to get a 23% return.