Question
Problem 12-16 Accounting measures of performance Use the cash flows and competitive spreads shown in the table below. ($ millions) Year 0 Year 1 Year
Problem 12-16 Accounting measures of performance Use the cash flows and competitive spreads shown in the table below.
($ millions) | ||||
Year 0 | Year 1 | Year 2 | Years 310 | |
Investment | 160 | |||
Production (millions of pounds per year) | 0 | 0 | 46 | 86 |
Spread ($ per pound) | 1.01 | 1.01 | 1.01 | 1.01 |
Net revenues | 0 | 0 | 46.46 | 86.86 |
Production costs | 0 | 0 | 36.00 | 36.00 |
Transport | 0 | 0 | 0 | 0 |
Other costs | 0 | 26 | 26 | 26 |
Cash flow | 160 | 26 | 15.54 | 24.86 |
NPV (at r = 9%) = 0 |
a. Calculate the yearbyyear book and economic profitability for investment in polyzone production. Assume straightline depreciation over 10 years and a cost of capital of 9%. (Negative answers should be indicated by a minus sign. Leave no cells blank be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your income answers in millions rounded to 2 decimal places and enter the rate of return as a percent rounded to 2 decimal places.)
Period | book income (in millions | Book Rate of return | economic income |
1 | |||
2 | |||
3 | |||
4 | |||
5 | |||
6 | |||
7 | |||
8 | |||
9 | |||
10 |
b1. What is the economic rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b2. Now compute the steadystate book rate of return (ROI) for a mature company producing polyzone. Assume no growth and competitive spreads. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started