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Task 1:
Total depreciable capital investment for a new project is $35.2 million. The pre-tax net annual income of this project is projected to start at $3,000,000 in year 1, and to increase by 3% annually through the 20 year life of this project.Thirty-five percent of the depreciable capital falls under a 7-year depreciation schedule and the remainder falls under a 15year depreciation schedule.
i. Compare MACRS depreciation and straight-line depreciation: based solely on the tax effects, which depreciation method (SL or MACRS) would yield a higher net present value for the project? (assume annual interest rate of 12%, compounded annually, tax rate of 35%).
ii. How sensitive is your answer to the interest rate (e.g., if the interest rate varies between, say 8% and 15%?)
iii. How sensitive is your answer to the tax rate (e.g., if the tax rate varies between 35% and 28%)
Task 2: In this part use 12 MM as the initial capital investment
Given the following economic information for a new specialty chemical plant:
i. Initial (depreciable) capital investment: YOUR ASURITE ID, DIVIDED BY 100, rounded to 3 sig figs. E.g., if your ID were 1234567890, the initial capital investment would be $12.3 MM.)
ii. Additional depreciable capital investment at the end of year 8: $ 1.3 MM
iii. All equipment depreciated using 10 years MACRS rates.
iv. Required initial working capital: 12% of depreciable capital for the project
v. Assume annual production hours for this project falls in line with typical chemical processes. Production rate is 220 kg/day. The product can currently be sold for $18.4/kg and the price has been increasing by an average of 2.8% annually for the past 10 years.
vi. The raw materials for the process cost $1.95/kg with a steady increase of 2.5 % in value over the past 10 years and 95 wt% of the raw material is converted to product.
vii. The utilities cost $220K annually, not expected to increase or decrease
viii. The labor cost for the process is $200K annually, not expected to increase or decrease
ix. Taxes are 35% of annual profit.
a. If a MAR of 15% is required calculate the NPV for this project.
b. What is the DCFRoR for this project.
c. If you could decrease ONE of the following by 10%, which would be most economically advantageous, and why - justify your answer quantitatively, and discuss.
Tax rate
Raw Material cost
Utility cost
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Reflections are the thoughts or processes that we think about or what we acquire from the readings and studies. It basically revolves around our perceptions and analysis of things as we go through them or experience them. There are two factors involves under reflection and they include pre-reflection and post-reflection. It is about developing a serious thought or consideration about something (Croft, 2012). Talking about pre-reflection, it refers to our understanding and expectations in terms of a concept that we are about to go through and study. Post-reflections are the critical analysis that we adhere to once we have understood the terms and gone through the work.