The Lake Charles Chemicals LLC is considering investing in a new gas to liquids technology. R&D scientists and engineers are investigating a new liquid-based catalyst system that will enable to operate the reactor at lower temperature and pressure to achieve higher conversion efficiencies. The company expects a three-year R&D period before they start producing the product as a commercial commodity.

The following financial information is presented for management review.

R&D Cost: $6.5 million over a three-year period: $1 million at the beginning of year; $2.5 million at the beginning of year 2; and $3 million at the beginning of year 3. For tax purposes, these R&D expenditures will be expensed rather than amortized.

Capital investment: $5 million at the beginning of year 4. This investment consists of $2 million in a building and $3 million in plant equipment. The company already owns a piece of land as the building site.

Financing: The company also borrowed $2 million from a national bank at 25% interest at the beginning of year 4.

Depreciation method: The building is depreciated based on straight line depreciation method and the plant equipment is depreciated based on double-declining balance method.

Project life: 10 years after a three-year R&D period.

Salvage value: 10% of the initial capital investment for the equipment and 50% for the building (at the end of the project life)

Total Sales: $50 million (at the end of year 4), with an annual sales growth rate of 10% per year (compound growth) during the next five years (year 5 through year 9) and - 10% (negative compound growth) per year for the remaining project life.

Out-of-pocket expenditures: 80% of annual sales.

Working Capital: $5 million is considered as an investment at the beginning of year 4 and fully recovered at the end of project life.

Marginal tax rate: 40%

a) Determine the net after-tax cash flows over the project life

b) Determine the IRR for this investment

c) Determine the equivalent annual worth for the investment at MARR = 20%