Lignin is a basic component of almost any plant that grows, so it is one of the
ID: 1135408 • Letter: L
Question
Lignin is a basic component of almost any plant that grows, so it is one of the most abundant organic compounds in the world. Almost anything derived from oil can be made out of lignin. The question is "can we do it cost-effectively and consistently?" A startup company has developed a process to derive plastics, carbon fiber and other advanced materials from lignin. The cash flow diagram for this process is shown below (in $ millions). If the company's hurdle rate (MARR) is 20% per year, is this a profitable undertaking?
60 50 A 40 A 30 A 20 A 10 A 0 123 4 5678 9 1 10 20 EOY 30Explanation / Answer
The MARR is 20%.
The question is silent about the method of evaluation.
Hence, using the present worth method and finding whether the project is profitable or not
Present worth of cash outflows
= - 30 – 20(1+.20)-1 – 10(1+.20)-2 = -53.61
Inflows are given in a gradient series. So compensating all the gradients and converting it to uniform cash flow series.
A = A1 + G (A/G, 20%, 6)
A = 10 + 10 (1.979) =29.79
Calculating the PW of the annual cash flow calculated above at the end of 3rd year
PW at 3rd year = 29.79 (P/A, 20%, 6)
PW at 3rd year = 29.79 (3.3255) = 99.06
Taking the single amount calculated above to 0th year
PW = 99.06 (1+.20)-3 = 57.32
NPW = - PW of cash outflows + PW of cash inflows
NPW = -53.61 + 57.34 = 3.73
It can be seen from the above calculations that the present worth of the inflows is more than the present worth of the cash outflows. Therefore it can be concluded that the project can be undertaken and it is a profitable project.
(NOTE – The cash flow figures taken in the above calculations are in $ millions.)
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