CBE 463 Homework #4 Due Monday, September 27, 2021 1. A grass-roots project for a new chemical plant is being considered. The land can be purchased for $10 MM (million dollars) at the beginning of year 0. The total fixed capital investment will be $165 MM, of which $50 MM is incurred in year 0, $70 MM in year 1, and the remaining S45 MM in year 2. Plant startup occurs in the middle of year 2. $15 MM in working capital for raw materials and spare parts inventory must be purchased in year 2 just prior to startup. Year 2 revenue is estimated as $40 MM, and year 2 operating costs are estimated as $15 MM. For years 3-10, annual revenue is $70 MM/yr, and the operating costs will be $25 MM/yr. Assume the plant will be shut down at the end of year 10, at which time working capital is sold off for $15 MM, the plant is sold for a salvage value of $30 MM, and the land is sold for $10 MM. The fixed capital investment for this plant is to be depreciated (starting in year 2) using the MACRS Method for equipment with a 9.5 year class life and a 5 year recovery period. The effective income tax rate is 40%. Using the table format below, calculate the after-tax cash flows for years 0-10 for this project. Then calculate the after-tax NPV for the project, assuming the minimum rate of return (after tax) is 10% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 0 Revenue -op. cost -depreciation Taxable income Tax @ 40% Net income +depreciation working capital -capital cost After-tax cash flows CBE 463 Homework #4 Due Monday, September 27, 2021 1. A grass-roots project for a new chemical plant is being considered. The land can be purchased for $10 MM (million dollars) at the beginning of year 0. The total fixed capital investment will be $165 MM, of which $50 MM is incurred in year 0, $70 MM in year 1, and the remaining S45 MM in year 2. Plant startup occurs in the middle of year 2. $15 MM in working capital for raw materials and spare parts inventory must be purchased in year 2 just prior to startup. Year 2 revenue is estimated as $40 MM, and year 2 operating costs are estimated as $15 MM. For years 3-10, annual revenue is $70 MM/yr, and the operating costs will be $25 MM/yr. Assume the plant will be shut down at the end of year 10, at which time working capital is sold off for $15 MM, the plant is sold for a salvage value of $30 MM, and the land is sold for $10 MM. The fixed capital investment for this plant is to be depreciated (starting in year 2) using the MACRS Method for equipment with a 9.5 year class life and a 5 year recovery period. The effective income tax rate is 40%. Using the table format below, calculate the after-tax cash flows for years 0-10 for this project. Then calculate the after-tax NPV for the project, assuming the minimum rate of return (after tax) is 10% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 0 Revenue -op. cost -depreciation Taxable income Tax @ 40% Net income +depreciation working capital -capital cost After-tax cash flows
