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The Charvon oil company is planning to make a large investment in coal - to - liquids ( CTL ) gasoline. The end product will
The Charvon oil company is planning to make a large investment in coaltoliquids CTL gasoline. The end product will be a perfect substitute for gasoline made from petroleum, but the feedstock will be coal instead of oil. Two technologies are available to the Charvon Company. The first is called indirect CTL where the coal is gasified prior to being liquefied. The second is called direct CTL where the coal is dissolved in a solvent, and the resulting liquid is processed into gasoline. The Charvon Company has hired you as a consultant to help them decide which technology they should choose.
Charvon expects to produce million gallons of CTL gasoline in each of the next twenty five years, and they can sell the gasoline for $ per gallon. The capital cost of indirect CTL is $ million and operating costs for indirect CTL labor fuel, and maintenance are $ per year. The capital cost of direct CTL is $ million and operating costs for direct CTL are $ per year.
One problem with indirect CTL is that the coal gasification process releases large amounts of CO into the atmosphere. Assume that for every gallon of gasoline produced with indirect CTL tons of CO are released. You have learned that starting from year the government might implement a tax of $ per ton of CO which is applied as an increase in the operating cost since year Assume that if you choose direct CTL you will not be subject to the tax on CO
Assume capital cost for both technologies can be depreciated using the straight line with a depreciation lifetime of years, starting from year to year There is no salvage value so capital cost is depreciated. Consider an income tax rate of for the taxable income and a discount rate of for all costs and revenues.
Calculate the NPV and IRR for each of the two CTL technologies and discuss whether the CO tax changes the decision that Charvon should make.
Find the ENPVs when the probability of government implementing the carbon tax is
Perform a sensitivity analysis of the Expected NPV of direct and indirect CTL on the probability of a $ton carbon tax that is implemented in Year On a single set of axes, plot the Expected NPV for each of the two technologies as a function of the probability of the carbon tax.
Identify the threshold probability of the tax where an expectedvalue decisionmaker would change their decision about what plant to build.
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