Question
Use the cash flows and competitive spreads shown in the table below. ($ millions) Year 0 Year 1 Year 2 Years 310 Investment 140 Production
Use the cash flows and competitive spreads shown in the table below.
($ millions) | ||||
Year 0 | Year 1 | Year 2 | Years 310 | |
Investment | 140 | |||
Production (millions of pounds per year) | 0 | 0 | 55 | 95 |
Spread ($ per pound) | 1.10 | 1.10 | 1.10 | 1.10 |
Net revenues | 0 | 0 | 60.50 | 104.50 |
Production costs | 0 | 0 | 45.00 | 45.00 |
Transport | 0 | 0 | 0 | 0 |
Other costs | 0 | 35 | 35 | 35 |
Cash flow | 140 | 35 | 19.50 | 24.50 |
NPV (at r = 8%) = 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 8%. (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.)
year | Book income (in Millions) | Book rate of return(%) | economic income (in million) |
0 | |||
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.)
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