Economic details are set out below for the manufacture of several grades of the same chemical Higher purities command a premium price, but costs are higher Process Item A B Purity 95 99 5 Plant capacity (t yr) 4000 4000 Product value ($ ton of product) X 1 2X Fixed Capital cost ($ 1000) 600 900 Raw material ($ t product) 50 50 Energy cost ($ t product) 15 25 Labor cost ($) 160000 250000 Maintenance 10 of FCI Overhead ($) 400,000 500,000 Salvage value 40000 60000 Plant life 7 years 10 years DCFRR 0 22 Common data Working Capital 0 tax rate 0 25 Depreciation S L with life 7 Start up 0 0 im 0 15 What are the product prices for the processes Which process will you choose if you use incremental ROI as the criteria Determine whether we should choose process A or B What is the incremental DCFRR Computational hint Remember Newton Raphson method to solve f(x) 0 0 is xk 1 xk f(xk) f(xk) where k is the iteration counter If 50 of the capital cost associated with process 1 is financed at a nominal rate of 20 compounded continuously The loan will be paid back in years 2 and 3 in two equal installments What will be the effect on net present value of the alternative

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 14, 2024

Economic details are set out below for the manufacture of several grades of the same chemical. Higher purities command a premium price, but costs are

Economic details are set out below for the manufacture of several grades of the same chemical. Higher purities command a premium price, but costs are higher.

Process

Item A B

Purity 95 99.5

Plant capacity (t/yr) 4000 4000

Product value ($/ton of product) X 1.2X

Fixed Capital cost ($/1000) 600 900

Raw material ($/t product) 50 50

Energy cost ($/t product) 15 25

Labor cost ($) 160000 250000 Maintenance 10% of FCI

Overhead ($) 400,000 500,000

Salvage value 40000 60000

Plant life 7 years 10 years

DCFRR 0.22 ?

Common data

Working Capital = 0 tax rate = 0.25

Depreciation = S-L with life =7 Start-up = 0.0 im= 0.15

What are the product prices for the processes?

Which process will you choose if you use incremental ROI as the criteria?

Determine whether we should choose process A or B. What is the incremental DCFRR?

Computational hint: Remember Newton-Raphson method to solve f(x)=0.0 is xk+1 = xk - f(xk) / f(xk) where k is the iteration counter

If 50% of the capital cost associated with process 1 is financed at a nominal rate of 20% compounded continuously. The loan will be paid back in years 2 and 3 in two equal installments. What will be the effect on net present value of the alternative?