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	130
Production (millions of pounds per year)	0	0	43	83
Spread ($ per pound)	.98	.98	.98	.98
Net revenues	0	0	42.14	81.34
Production costs	0	0	33.00	33.00
Transport	0	0	0	0
Other costs	0	23	23	23
Cash flow	130	23	13.86	25.34
NPV (at r = 7%) = 0

Assume the dividend payout ratio each year is 100%. 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 7%. (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 of income $ Million	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.)