A new biotech plant is expected to cost (FCI_L) $20 million, with $10 million paid at the beginning of the project and $10 million paid at the end of year 1. There is no land cost because the land is already owned. The annual profit, before taxes, is $4 million and the working capital at startup (which occurs at the end of year 1) is $1 million. The plant life is 10 years after startup. The before-tax criterion for profitability is 12%. Assume that the plant has no salvage value, and that the working capital is recovered at the end of the project life.

Draw a labeled, discrete, nondiscounted cash flow diagram for this project.

Draw a labeled, cumulative, discounted (to year zero) cash flow diagram for this project.

What is the NPV for this project? Do you recommend construction of this plant?

What would the annual profit, before taxes, have to be for the NPV to be $2 million?

The plant is built and has been operational for several years. It has been suggested that $3 million be spent on plant modifications that will save money. Your job is to analyze the suggestion. The criterion for plant modifications is a 16% beforetax return over five years. How much annual savings are required before you would recommend in favor of investing in the modification?