Consider the following information given below: Year 0 Year 1 Year 2 Year 3 Year

Question

Consider the following information given below:

Year 0   Year 1 Year 2 Year 3 Year 4 Year 5-10
Investment 100                                                   
Required rate of return 12%                                                  
Production, millions of pounds per year      0          0           51           102 102           102       
Spread, $ per pound 1.31 1.31 1.31 1.31 1.21           1.06       
Production costs 0          0 41           41           41           41       
Transport 0 0           15           10           10           10       
Other costs 0          31 31           31           31           31       

a-1.  
Calculate the NPV of the proposed polyzone project, if spread in year 4 holds at $1.21 per pound. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-1.  
Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 51 million pounds in year 1 rather than year 2. For year 4, assume the spread in year 3 still applies. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  
  
  
c-1.  
Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technological advance that reduces its annual production costs to $30.5 million. Competitors’ production costs do not change. For year 4, assume the spread in year 3 still applies. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Consider the following information given below: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5-10 Investment 100 Required rate of return 12% Production, millions of pounds per year 0 0 51 102 102 102 Spread, $ per pound 1.31 1.31 1.31 1.31 1.21 1.06 Production costs 0 0 41 41 41 41 Transport 0 0 15 10 10 10 Other costs 0 31 31 31 31 31 a-1. Calculate the NPV of the proposed polyzone project, if spread in year 4 holds at $1.21 per pound. (Negative amount should be indicated by a minus sign. Do not Round intermediate calculations. Round your answer to 2 decimal places.) b-1. Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 51 million pounds in year 1 rather than year 2. For year 4, assume the spread in year 3 still applies. (Do not Round intermediate calculations. Round your answer to 2 decimal places.) c-1. Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technological advance that reduces its annual production costs to $30.5 million. Competitors' production costs do not change. For year 4, assume the spread in year 3 still applies. (Do not Round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

a-1     NPV of the proposed polyzone project

year PVF(12%,n years) cash flow present vaue total cost present value

1 0.893 (0 *$1.31) 0 31 27.68   

2 0.797 (51*$1.31) 53.25 87 69.34

3 0.712 (102 * $1.31) 95.14 82 58.38

4 0.636 (102*$1.21) 78.50 82 52.15

5-10 2.613 (102* $1.06) 282.52 82 214.27

509.41 421.82

  NPV = 509.41 - ( 100 + 421.82)

= 509.41 - 521.82

   = -($12.41)

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