A calcium carbide plant is reported to have the following economic investment da

Question

A calcium carbide plant is reported to have the following economic investment data: Total capital investment--$ 8,600,000 Working capital Plant service life = $ 600,000 = 10 years = 10% of annual net profits Income taxes At present the plant has a break even point (BEP) at 50% of full design production capacity. At the BEP the operating costs are: Raw materials cost Utilities cost General expenses $ 5,000,000 per year = $ 1,000,000 per year =$ 500,000 per year It is also known that the variable costs run at $ 60/ton of product produced. Estimate the pay back period when the plant operates at 90% of full design capacity.

Explanation / Answer

Among the operating costs we have rawmaterial cost and utilities cost as variable costs.

So total variable cost at BEP capacity = 5000,000 + 1000,000 = $ 6000,000

It is also given that variable cost per tonne = $ 60.

So we have BEP in terms of tonnes = 6000,000 / 60 = 100000 tonnes

At 90% capacity the production = 100,000 / 50% * 90% = 180,000 tonnes

Contribution per tonne = FIXED COST / BEP = 500,000 / 100,000 = $ 5

Calculation of annual cash flow from the project at 180000 tonnes.

Pay back period = Investment / Annual cash flow = 8600,000 / 446000 = 1.93 years..............final answer

Contribution    180000 * 5 900000 (-) General expenses ( fixed costs) 500000 Profit before tax and depreciation 400000 (-) Depreciation 860000 Loss before tax -460000 (+) Tax saved on loss 46000 Loss after tax savings -414000 (+) Depreciation 860000 Annual Cash flow from the project 446000

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