For the following problems, unless stated otherwise, you may assume that the cost of land, L, and the salvage value, S, of the plant are both zero.

Repeat Problem 10.8 using a straight-line depreciation method over 7 years. Compare the results with those obtained in Problem 10.8. Which depreciation method would you use?

Problem 10.8

The projected costs for a new plant are given below (all numbers are in $10⁶).

Land cost = $7.5

Fixed capital investment = $120 ($60 at end of year 1, $39.60 at end of year 2, and $20.40 at end of year 3)

Working capital = $35 (at startup)

Startup at end of year 3

Revenue from sales = $52

Cost of manufacturing (without depreciation) = $18

Tax rate = 40%

Depreciation method = MACRS over 5 years

Length of time over which profitability is to be assessed = 10 years after startup

Internal rate of return = 9.5% p.a.

For this project, do the following:

Draw a cumulative (nondiscounted) after-tax cash flow diagram.

From Part (a), calculate the following nondiscounted profitability criteria for the project:

Cumulative cash position and cumulative cash ratio

Payback period

Rate of return on investment

Draw a cumulative (discounted) after-tax cash flow diagram.

From Part (c), calculate the following discounted profitability criteria for the project:

Net present value and net present value ratio

Discounted payback period

Discounted cash flow rate of return (DCFROR)