UESTION:
Create a business memo based on my response below. Use an AW and ROR analysis to analyze and evaluate a company's investment decision. Create a two-page memo with only the main points, no extraneous information, and a description of which option I should choose. Use the date data for algae and corn to back up your answer.
Cash outflows Corn Algae Year 0 $1,900,000 $3,800,000 Present value of cash flows Year 1 $5,300,000 Net cash flows $7,100,000 Cash Inflows Annual O&M Corn Algae Corn Algae Corn Algae 1 $2,450,000 $2,800,000 $10,000,000 $10,000,000 $750,000 ($150,000) $652,173.91 ($130,434.78) $2,597,000.0 $2,968,000.0 0 0 $4,463,516.0 7 2 $5,128,166.3 5 $10,000,000 $10,000,000 $5,903,000 $6,782,000 $2,752,820.0 $3,146,080.0 0 0 3 $3,778,864.1 4 $4,342,184.6 0 $10,000,000 $10,000,000 $5,747,180 $6,603,920 $2,917,989.2 $3,334,844.8 $16,500,000. 0 0 00 $16,500,000 00 $11,962,01 1 $12,895,15 $6,839,318.5 5 0 $7,372,846.8 4 4 $3,093,068.5 $3,534,935.4 $16,500,000. 5 9 00 $16,500,000 00 $11,657,33 $12,673,46 $5,795,753.9 1 5 9 $6,300,951.7 1 on 5 $3,278,652.6 $3,747,031.6 $16,500,000. 7 2 00 $16,500,000 00 $11,331,77 $12,438,04 9 0 $4,899,040.9 2 $5,377,308.1 0 6 $3,475,371.8 $3,971,853.5 $16,500,000. 3 1 00 $16,500,000 00 $10,983,89 $12,188,02 $4,129,252.8 5 4 7 $4,581,929.7 6 7 $3,683,894.1 3 $4,210,164.7 3 $16,500,000 00 $16,500,000 00 8 $10,612,11 4 $11,922,50 $3,469,118.8 3 1 $3,897,487.4 6 $3,904,927.7 $4,462,774.6 $16,500,000 8 1 00 9 $16,500,000 00 $10,214,76 $11,640,50 $2,903,672.5 1 7 2 $3,308,958.5 4 10 $4,139,223.4 $4,730,541.0 $16,500,000. 5 9 00 $16,500,000. 00 $11,341,00 $2,419,948.2 $9,790,040 3 0 $2,803,322.4 6 $4,387,576.8 $5,014,373.5 $16,500,000. 6 5 00 11 $16,500,000 00 $11,022,89 $2,006,715.9 4 1 $9,336,028 $2,369,296.3 4 $4,650,831.4 $5,315,235.9 $16,500,000. 7 6 00 12 $16,500,000 00 $8,850,662 $10,685,01 3 $1,654,251.9 4 $1,997,105.3 1 $4,929,881.3 $5,634,150.1 6 2 13 $16,500,000 00 $16,500,000 00 $8,331,731 $10,326,11 9 $1,354,139.2 4 $1,678,282.9 6 Raw Material S Year 1 $1,500,000 $250,000 $44,365,767 02 $49,027,405. 64 $1,500,000 $250,000 N 3 $1,500,000 $250,000 $1,620,000.0 0 4 $270,000.00 $1,749,600.0 0 5 $291,600.00 6 $1,889,568.0 0 $314,928.00 $2,040,733.4 4 $340,122.24 $2,203,992.1 2 $367,332.02 $2,380,311.4 8 $396,718.58 $2,570,736.4 0 0 $428,456.07 $2,776,395.3 2 1 $462,732.55 12 . $2,998,506.9 4 $499,751.16 13 $3,238,387.5 0 $539,731.25 Net present value of Corn = -$ 1,900,000 + $44,365,767.02 + present value of salvage value e present value of salvage value = $ 3,000,000 / 1.15-13 present value of salvage value(Corn) = $ 487,583.87 Net present value of Corn = -$ 1,900,000+ $44,365,767.02 +$ 487,583.87 Net present value of Corn = $ 42,953,350.89 = present value of salvage value(Algae) = $ 3,600,000 / 1.15-13 present value of salvage value(Algae) = $ 585,100.64 Net present value of Algae = -$ 3,800,000+ $49,027,405.64 + $ 585,100.64 Net present value of Algae = $ 45,812,506.28 T The company should use Algae method to produce Biofuels. 6-43 - North Plains Biofuels (NPB) has negotiated a contract with an oil firm to sell 150,000 barrels of ethanol per year, for 10 years, beginning in the end of year (EOY) 4. The oil firm will pay NPB $10M annually beginning from EOYO to EOY3 and then $110 per barrel. 1) if NPB uses an interest rate of 15%, which method should be used to produce the biofuels? Annual O&E costs increase 2% per year and raw materials costs 3% per year. Purchase of land (EOYO) Facility Construction (EOY1) Annual O&E (EOY4) Raw Materials (EOY4) Salvage value (EOY13) Corn $1,9000,000 $5,300,000 $2,450,000 $1,500,000 $3,000,000 Algae $3,800,000 $7,100,000 $2,800,000 $250,000 $3,600,000 2) What are biofuels? How are they used in the automotive industry, and what are the pros and cons of this use? Cash outflows Corn Algae Year 0 $1,900,000 $3,800,000 Present value of cash flows Year 1 $5,300,000 Net cash flows $7,100,000 Cash Inflows Annual O&M Corn Algae Corn Algae Corn Algae 1 $2,450,000 $2,800,000 $10,000,000 $10,000,000 $750,000 ($150,000) $652,173.91 ($130,434.78) $2,597,000.0 $2,968,000.0 0 0 $4,463,516.0 7 2 $5,128,166.3 5 $10,000,000 $10,000,000 $5,903,000 $6,782,000 $2,752,820.0 $3,146,080.0 0 0 3 $3,778,864.1 4 $4,342,184.6 0 $10,000,000 $10,000,000 $5,747,180 $6,603,920 $2,917,989.2 $3,334,844.8 $16,500,000. 0 0 00 $16,500,000 00 $11,962,01 1 $12,895,15 $6,839,318.5 5 0 $7,372,846.8 4 4 $3,093,068.5 $3,534,935.4 $16,500,000. 5 9 00 $16,500,000 00 $11,657,33 $12,673,46 $5,795,753.9 1 5 9 $6,300,951.7 1 on 5 $3,278,652.6 $3,747,031.6 $16,500,000. 7 2 00 $16,500,000 00 $11,331,77 $12,438,04 9 0 $4,899,040.9 2 $5,377,308.1 0 6 $3,475,371.8 $3,971,853.5 $16,500,000. 3 1 00 $16,500,000 00 $10,983,89 $12,188,02 $4,129,252.8 5 4 7 $4,581,929.7 6 7 $3,683,894.1 3 $4,210,164.7 3 $16,500,000 00 $16,500,000 00 8 $10,612,11 4 $11,922,50 $3,469,118.8 3 1 $3,897,487.4 6 $3,904,927.7 $4,462,774.6 $16,500,000 8 1 00 9 $16,500,000 00 $10,214,76 $11,640,50 $2,903,672.5 1 7 2 $3,308,958.5 4 10 $4,139,223.4 $4,730,541.0 $16,500,000. 5 9 00 $16,500,000. 00 $11,341,00 $2,419,948.2 $9,790,040 3 0 $2,803,322.4 6 $4,387,576.8 $5,014,373.5 $16,500,000. 6 5 00 11 $16,500,000 00 $11,022,89 $2,006,715.9 4 1 $9,336,028 $2,369,296.3 4 $4,650,831.4 $5,315,235.9 $16,500,000. 7 6 00 12 $16,500,000 00 $8,850,662 $10,685,01 3 $1,654,251.9 4 $1,997,105.3 1 $4,929,881.3 $5,634,150.1 6 2 13 $16,500,000 00 $16,500,000 00 $8,331,731 $10,326,11 9 $1,354,139.2 4 $1,678,282.9 6 Raw Material S Year 1 $1,500,000 $250,000 $44,365,767 02 $49,027,405. 64 $1,500,000 $250,000 N 3 $1,500,000 $250,000 $1,620,000.0 0 4 $270,000.00 $1,749,600.0 0 5 $291,600.00 6 $1,889,568.0 0 $314,928.00 $2,040,733.4 4 $340,122.24 $2,203,992.1 2 $367,332.02 $2,380,311.4 8 $396,718.58 $2,570,736.4 0 0 $428,456.07 $2,776,395.3 2 1 $462,732.55 12 . $2,998,506.9 4 $499,751.16 13 $3,238,387.5 0 $539,731.25 Net present value of Corn = -$ 1,900,000 + $44,365,767.02 + present value of salvage value e present value of salvage value = $ 3,000,000 / 1.15-13 present value of salvage value(Corn) = $ 487,583.87 Net present value of Corn = -$ 1,900,000+ $44,365,767.02 +$ 487,583.87 Net present value of Corn = $ 42,953,350.89 = present value of salvage value(Algae) = $ 3,600,000 / 1.15-13 present value of salvage value(Algae) = $ 585,100.64 Net present value of Algae = -$ 3,800,000+ $49,027,405.64 + $ 585,100.64 Net present value of Algae = $ 45,812,506.28 T The company should use Algae method to produce Biofuels. 6-43 - North Plains Biofuels (NPB) has negotiated a contract with an oil firm to sell 150,000 barrels of ethanol per year, for 10 years, beginning in the end of year (EOY) 4. The oil firm will pay NPB $10M annually beginning from EOYO to EOY3 and then $110 per barrel. 1) if NPB uses an interest rate of 15%, which method should be used to produce the biofuels? Annual O&E costs increase 2% per year and raw materials costs 3% per year. Purchase of land (EOYO) Facility Construction (EOY1) Annual O&E (EOY4) Raw Materials (EOY4) Salvage value (EOY13) Corn $1,9000,000 $5,300,000 $2,450,000 $1,500,000 $3,000,000 Algae $3,800,000 $7,100,000 $2,800,000 $250,000 $3,600,000 2) What are biofuels? How are they used in the automotive industry, and what are the pros and cons of this use
