Question

Instructions: Please answer all questions clearly and completely. If you use graphs or tables in your answers, they must be clear enough that I can understand them (this means labeling axes, variables, and so forth). Please remember to include correct units in all of your final answers – this includes both graphs and tables as well as calculation questions. If a question requires you to make calculations, you must show your work. Please use two decimal places in all numerical responses. If a number is smaller than 0.001 please express it in scientific notation (e.g. 10-3) Your homework must be typed up, no handwritten work will be graded. See the syllabus for other formatting details.

The Charvon oil company is planning to make a large investment in coal-to-liquids (CTL) gasoline. The end product will be a perfect substitute for gasoline made from petroleum, but the feedstock will be coal instead of oil. Two technologies are available to the Charvon Company. The first is called indirect CTL, where the coal is gasified prior to being liquefied. The second is called direct CTL, where the coal is dissolved in a solvent, and the resulting liquid is processed into gasoline. The Charvon Company has hired you as a consultant to help them decide which technology they should choose.

Charvon expects to produce 2 million gallons of CTL gasoline in each of the next twenty years, and they can sell the gasoline for $1.75 per gallon. The capital cost of indirect CTL is $12 million and operating costs for indirect CTL (labor, fuel, and maintenance) are $650,000 per year. The capital cost of direct CTL is $20 million and operating costs for direct CTL are $300,000 per year.

Question (50 points): Assume capital cost for both technologies can be depreciated using straight line with project life time of 20 years, starting from year 1 to year 20. Consider tax rate of 30% for the taxable income and discount rate of 8% for all costs and revenues. Calculate the following metrics for after tax cash flow (ATCF) and conclude which technology Charvon should choose.

Assume that the capital costs are incurred entirely in Year 0, and the operating costs and annual revenues are collected beginning at the end of Year 1. (In other words, capital costs are not discounted but all other annual costs and revenues are discounted.)

• NPV

• ROR

• B/C

• PVR

Answer 1

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Particulars (1) Initial anvertment Andirect Direct CTL CTL C12.000000) (20,000,000) 3 500 000 350000U C65000 (300000 Annual revenue lets Annual Cost (1) Annual Cash flow 28,50,000 321001000 9-818 27981300 31417600 19981300 11H17600 cir) Cummilatine pr factos @ 80% for doys9.818 (1) pu of Cash flows over next 2015 (ir) x Cire) a) Net present value = Civil b) Rate return = CR/p) . 23.750) c) Benifits to cost sratro - Couli) D) present valere ratio=C ) Rate of 16.002) 2.33 1.57 1.33 O. 57.