Consider the following information given below: Calculate the NPV of the propose

Question

Consider the following information given below: Calculate the NPV of the proposed polyzone project, if spread In year 4 holds at $1.18 per pound. (Negative amount should be indicated by a minus sign. Do not round Intermediate calculations. Round your answer to 2 decimal places.) Net present value What's the right management decision? The project is acceptable The project is not acceptable Calculate the NPV of the proposed polyzone project, if the U S. chemical company can start up polyzone production at 48 million pounds in year 1 rather than year 2. For year 4. assume tho spread In year 3 still applies. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Net present value What's the right management decision? The project is acceptable The project is not acceptable. Calculate the NPV of the proposed polyzone project if the U.S company makes a technological advance that reduces its annual production costs to $29.0 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.) Net present value What's the right management decision?

Explanation / Answer

(1-1) Computation of NPV of proposed polyzone project:   

Net Present value (in million) = $(-)10.39

(1-2) Management decision : The project is not acceptable as NPV is negative.

(2-1) NPV, if U.S. Chemical company can start production of 48 millions of pounds is year 1 & spread of 1.28 $ per pound is applied.

Net Present Value (in million) = $8.21

(2-2) Management decision: The propject is acceptable, as NPV is positive.

(3-1) NPV, in case of annual productin cost of $29 million:

Net Present Value (in million) = $43.28.

(3-2) Management decision : The project is acceptable as NPV is positive.

Descripotaion Unit Year 0 Year 1 Year 2 Year 3 Year 4 Year 5-10 NPV a Production mill. of pounds 0 0 48 96 96 96 b Spread $ per pound 1.28 1.28 1.28 1.28 1.18 1.03 c Cash Inflow from sales $ in million (a x b) 0 0 61.44 122.88 113.28 98.88 d Cash outflow i) Initial investment $ in million 100 0 0 0 0 0 ii) Production Cost $ in million 0 0 38 38 38 38 iii) Transport cost $ in million 0 0 12 10 10 10 iv) Other cost $ in million 0 28 28 28 28 28 d v) Total cost ( i + iv) $ in million 100 28 78 76 76 76 e Net Cash inflow (c - d) $ in million -100 -28 -16.56 46.88 37.28 22.88 f Discounting factor @10% 1 0.909 0.826 0.751 0.683 2.975 g Dicounted Cash Inflow(exf) $ in million -100.00 -25.45 -13.68 35.21 25.46 68.07 -10.39

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