Homework #1 American Chemical Case Questions

1. Which firms are the "identical twins" of the Collinsville investment? Using the 's for those assets and the methodology learned in this course, determine the appropriate discount rate for the Collinsville investment. 2. Calculate the net present value of the Collinsville plant without the laminate technology. Remember that the transaction takes place at the end of 1979. Assume: - Project lasts 10 years (1980-1990) - Project is 100% equity financed - At the end of 10 years, the plant will be scrapped and will have zero salvage value - For capital expenditures (1980-84) you should remember that PPEt=PPEt1+CapExt Depr t where PPE is property, plant and equipment - Capital expenditures=600 per year for 19851989 (Remember capital expenditures are depreciated) - Straight line depreciation - Net working capital=accounts receivable+inventory-accounts payable - No change in net working capital, 1985-89 - No change in operating profits, 198589 - Corporate tax rate =48% - debt=0 3. Calculate the incremental NPV from adding the laminate technology to the Collinsville plant. What is the NPV of the Collinsville plant with the laminate technology? Assume: - Without laminate, graphite costs would increase by 5% per year after 1984 - Save 1520% of power costs with laminate. - Power costs rise at 12% after 1984 4. Under these terms, should Dixon purchase the Collinsville plant? Do you believe the profit projections given in the case? How would this effect your decision to purchase the plant? 1. Which firms are the "identical twins" of the Collinsville investment? Using the 's for those assets and the methodology learned in this course, determine the appropriate discount rate for the Collinsville investment. 2. Calculate the net present value of the Collinsville plant without the laminate technology. Remember that the transaction takes place at the end of 1979. Assume: - Project lasts 10 years (1980-1990) - Project is 100% equity financed - At the end of 10 years, the plant will be scrapped and will have zero salvage value - For capital expenditures (1980-84) you should remember that PPEt=PPEt1+CapExt Depr t where PPE is property, plant and equipment - Capital expenditures=600 per year for 19851989 (Remember capital expenditures are depreciated) - Straight line depreciation - Net working capital=accounts receivable+inventory-accounts payable - No change in net working capital, 1985-89 - No change in operating profits, 198589 - Corporate tax rate =48% - debt=0 3. Calculate the incremental NPV from adding the laminate technology to the Collinsville plant. What is the NPV of the Collinsville plant with the laminate technology? Assume: - Without laminate, graphite costs would increase by 5% per year after 1984 - Save 1520% of power costs with laminate. - Power costs rise at 12% after 1984 4. Under these terms, should Dixon purchase the Collinsville plant? Do you believe the profit projections given in the case? How would this effect your decision to purchase the plant