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.

Item Process A Process B

Purity 95 99.5

Plant capacity (ton/yr) 4000 4000

Product value ($/ton of product) X Y

Fixed Capital cost ($/1000) 600 900

Raw material ($/ton product) 50 50

Energy cost ($/ton product) 15 25

Labor cost ($) 16,000 25,000

Maintenance 10% of capital 10% of capital

Overhead ($) 40,000 50,000

Salvage value 40,000 60,000

Plant life 7 years 10 years

DCFRR 0.22 0.20

Common data

Working Capital = 0 Tax Rate = 0.35

Depreciation = Straight-Line Dep. With life of 7 Start-up = 0.0

im = 0.15

i) What are the product prices X and Y for processes A and B?

ii) Which process would you choose if you used incremental ROI (ROI) as the

criterion?

iii) Determine whether we should choose process A or B. What is incremental DCFRR

(DCFRR)?

DCFRR: Discounted Cash Flow Rate of Return

im: Minimum effective interest rate