Reference no: EM13883583
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