Consider the following information: ............................................

Question

Consider the following information:

......................................................................Year 0......... Year 1....... Year 2....... Year 3..... ..Year 4..... Years 5-10

Investment___________________________ 100

Required rate of return__________________ 17%

Production, millions of pounds per year______ 0_________ 0______ 60________ 120______ 120________120

Spread, $ per pound___________________ 1.40______ 1.40_____ 1.40 _______1.40______ 1.30_______ 1.15

Production Costs________________________ 0________ 0 _______50_________ 50_______ 50_________ 50

Transportation__________________________ 0 ________0_______ 24_________ 10_______ 10_________ 10

Other costs _____________________________0_______ 40_______40_________ 40_______40_________ 40

a-1.) Calculate the NPV of the proposed polyzone project, if spread in year 4 holds at $1.30 per pound.

b-1.) Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 60 million pounds in year 1 rather than year 2.

c-1.) Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technical advance that reduces its annual production costs to $35.0 million. Competitors' production costs do not change.

Explanation / Answer

Sorry. Answer c-1 is

NPV = -100 + 0 -40/1.17^2 + {60*1.4 - (35+24+40)}/1.17^3 + {120*1.4 - (35+10+40)}/1.17^4 + {120*1.3 - (35+10+40)}/1.17^5 + {120*1.15 - (35+10+40)}/1.17^6 + {120*1.15 - (35+10+40)}/1.17^7 + {120*1.15 - (35+10+40)}/1.17^8 + {120*1.15 - (35+10+40)}/1.17^9 + {120*1.15 - (35+10+40)}/1.17^10 + {120*1.15 - (35+10+40)}/1.17^11 = $24.85 mn = Answer.

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