proposals for 3 mutually exclusive plants: A,B You work for a chemical company.
ID: 2555088 • Letter: P
Question
proposals for 3 mutually exclusive plants: A,B You work for a chemical company. They have and C. Esch of A, B and C makes a similar product, so the company will not build more than one of these projects (they are mutually exclusive). Plant A will take longer to get in production because of site acquisition and regulatory issues. MARR which the company's finance department reviews annualy, is set at 14.0%. An engineer bring you the following after tax cash flow forecasts, which have been reviewed and are considered acourate. Your company has ample funds for capital projects and is keen to invest but wants to pursue only one praject at this time. a. Determine the NPW (Net Present Warth) at MARR, simple peyback (you can simply give the year (integer) in which payback oocurs, calculated from startup (first year of positive cash low)), and the IRR (Intemal Rate of Return) calculated as a percent to one decimal place, for each of the three plants; enter the numbers in the table below. b. Which plant should your company invest in, and why? G. If your company later raisns a concen that there is a significant risk that the ife of the product may be shorter than the estimates because ofthe possible emergence of compeling products, but stil wants to proceed with ons of these planis, would you change your answor in (b)? Why or why not? All values in S Milions 330.00 80.00 70.00 80.00 90.00 80.00 70.00 50.00 $ 35.00 S 20.00 (780.00 140.00 50.00 5 150.00 50.00 (335 C0) 90.00 90.00 0.00 0.00 90.00 95,00 95.00 160.00 160.00 50.00 160.00 PaybackExplanation / Answer
Part A Calculation of NPV Year A B C pvf @ 14% Cash Flow of A Cash Flow of B Cash Flow of C 0 -35 -330 -780 0.877 -30.695 -289.41 -684.06 1 -335 60 140 0.769 -257.615 46.14 107.66 2 55 70 150 0.675 37.125 47.25 101.25 3 60 80 150 0.592 35.52 47.36 88.8 4 80 90 150 0.519 41.52 46.71 77.85 5 90 80 160 0.455 40.95 36.4 72.8 6 90 70 160 0.399 35.91 27.93 63.84 7 90 50 160 0.35 31.5 17.5 56 8 90 35 160 0.307 27.63 10.745 49.12 9 95 20 160 0.269 25.555 5.38 43.04 10 95 20 160 0.237 22.515 4.74 37.92 NPV 9.915 0.745 14.22 Calculation of Payback Period 9+12.6/22.515 9+3.995/4.74 9+23.7/37.92 Payback Period 9.56 9.843 9.62 Calculation of IRR Year A B C pvf @ 16% Cash Flow of A Cash Flow of B Cash Flow of C 0 -35 -330 -780 0.862 -30.17 -284.46 -672.36 1 -335 60 140 0.743 -248.905 44.58 104.02 2 55 70 150 0.641 35.255 44.87 96.15 3 60 80 150 0.552 33.12 44.16 82.8 4 80 90 150 0.476 38.08 42.84 71.4 5 90 80 160 0.41 36.9 32.8 65.6 6 90 70 160 0.354 31.86 24.78 56.64 7 90 50 160 0.305 27.45 15.25 48.8 8 90 35 160 0.263 23.67 9.205 42.08 9 95 20 160 0.226 21.47 4.52 36.16 10 95 20 160 0.195 18.525 3.9 31.2 NPV -12.745 -17.555 -37.51 Working 14+2*9.915/22.66 14+2*0.745/18.3 14+2*14.22/51.73 IRR 14.87% 14.08% 14.55% Part B Project C should be chosen as it has a highest NPV among other projects Part C Project A should be chosen as it has low payback period among other projects
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