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Compare macrs depreciation and straight-line depreciation
Course:- Chemical Engineering
Reference No.:- EM13883583




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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

Answered:-

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