Reevaluate the NPV of the proposed polyzone project under each of the following assumptions. Follow the format
Question:
Reevaluate the NPV of the proposed polyzone project under each of the following assumptions. Follow the format of Table 11.3. What?s the right management decision in each case?
a. Competitive entry does not begin until year 5, when the spread falls to $1.10 per pound, and is complete in year 6, when the spread is $.95 per pound.
b. The U.S. chemical company can start up polyzone production at 40 million pounds in year 1 rather than year 2.
c. The U.S. company makes a technological advance that reduces its annual production costs to $25 million. Competitors? production costs do not change.
Year 5-10 4. 100 Investment Production, millions of pounds per 40 80 80 80 year Spread, dollars per pound 1.20 1.20 1.20 1.20 1.10 .95 Net revenues Production costs Transport Other costs 0. 48 96 76 30 30 30 30 4 8. 8. 8. 20 20 20 20 20 Cash flow -100 -20 -6 +38 +30 +18 NPV (at r= 8%) = -$10.3
Step by Step Answer:
a See the table below the net present value is positive at 376 million However this seem...View the full answer
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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