3. A proposal to manufacture 5000 t/yr. of a halogenated organic intermediate is

Question

3. A proposal to manufacture 5000 t/yr. of a halogenated organic intermediate is set out below Estimated total capital cost Construction time Working capital Operating cost (exc. depreciation) Revenue from sales Plant life Salvage value Land value Income tax rate Depreciation Method S2,500,000 2 years 20% of FCI $80 per ton of product 400 dollars per ton of product 10 years $200,000 S500,000 25 % MACRS Operating cost at reduce capacity is expressed as follows: 0.5 OC S80* (Capacity 5000) Time Market forecast (t/yr) 1500 1600 1700 1900 2500 3400 4700 5100 5300 4700 4000 2000 0 10 12 on Assuming that the intermediate is storable for a maximum of one year, would you recommend proceeding with the proposal? Justify your answer. Analyze the cash flow position. The dollar values are based on year 2 dollar which is the first year of

Explanation / Answer

Estimated total capital cost $2,500,000 N Year 1 2 3 4 5 6 7 8 9 10 11 X InitialCash Flow ($2,500,000) A Sales Forecast(Tonnes) 1700 1900 2500 3400 4700 5100 5300 4700 4000 2000 B=A*400 Sales Revenue $        680,000 $    760,000 $   1,000,000 $    1,360,000 $       1,880,000 $ 2,040,000 $   2,120,000 $ 1,880,000 $   1,600,000 $       800,000 C=80*((A/5000)^0.5) Operating Cost (Per tonne) $            46.65 $         49.32 $           56.57 $            65.97 $               77.56 $           80.80 $           82.37 $          77.56 $            71.55 $           50.60 D=A*C Total Operating Cost(Excld.Depreciation) $          79,301 $      93,699 $       141,421 $       224,297 $           364,546 $      412,060 $      436,535 $     364,546 $       286,217 $       101,193 E MACRS Depreciation Rate 10% 18% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.56% 6.55% 3.28% F=E*2500000 Annual Depreciation $        250,000 $    450,000 $       360,000 $       288,000 $           230,500 $      184,250 $      163,750 $     163,750 $       164,000 $       163,750 G Accumulated Depreciation $        250,000 $    700,000 $   1,060,000 $    1,348,000 $       1,578,500 $ 1,762,750 $   1,926,500 $ 2,090,250 $   2,254,250 $   2,418,000 H=B-D-F Income Before taxes $        350,699 $    216,301 $       498,579 $       847,703 $       1,284,954 $ 1,443,690 $   1,519,715 $ 1,351,704 $   1,149,783 $       535,057 I=H*0.25 Tax expense $          87,675 $      54,075 $       124,645 $       211,926 $           321,239 $      360,923 $      379,929 $     337,926 $       287,446 $       133,764 J=H-I Net Income after tax $        263,024 $    162,226 $       373,934 $       635,777 $           963,716 $ 1,082,768 $   1,139,786 $ 1,013,778 $       862,337 $       401,293 K=J+F Annual Operating Cash Flow $        513,024 $    612,226 $       733,934 $       923,777 $       1,194,216 $ 1,267,018 $   1,303,536 $ 1,177,528 $   1,026,337 $       565,043 L=0.2*X Working Capital cash flow ($500,000) $500,000 M=(1-0.25)*200000 After tax cash flow from salvage value $       150,000 P Cash flow from land $500,000 SUM Q=X+K+L+M+P Net Cash Flow ($3,000,000) $        513,024 $    612,226 $       733,934 $       923,777 $       1,194,216 $ 1,267,018 $   1,303,536 $ 1,177,528 $   1,026,337 $   1,715,043 $7,466,640 Dollar values are based on Year 2 Dollar Inflation is already discounted in the cash flow Totalvalue of Net Cash Flow $7,466,640 Net Cash Flow is positive In absence of information on cost of capital,it is ignored It is recommended to accept the proposal

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