Produce chemical whose spread or margin

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Reference no: EM131875717

Cooper Chemical Inc. wants to invest in equipment worth $10,800,000 to produce a chemical whose spread or margin (price minus cost per unit) is currently estimated at $1.4 per unit. The company estimates its market share at 1,900,000 units per year for the next 12 years. The equipment would be depreciated on a straight line basis over its 12-year economic life to a book value of zero. The equipment is expected to have a market salvage value of $3,200,000 at the end of year twelve. The tax rate is 40%. Tax rate is only relevant for depreciation. The required rate of return on the project is 14%.

a. Calculate the NPV of the investment.

b. Upon further consideration, the company realizes that the $1.4/unit margin reflects economic rents that will not continue after year six. The competition will catch up so that by the end of year seven the margin the company will be able to realize is that at which the NPV of a replica investment would be zero. Calculate the competitive margin after year six.

c. Calculate the reassessed NPV of the 12-year project based on the results of part b above.

Reference no: EM131875717

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