Problem 2

A proposed process (see table below) has a lifetime of 10 years and a total fixed capital investment of $60 million (to be committed in equal parts over years 0 and 1). Just prior to startup (end of year 1), a working capital of $25 million is required. Projected annual revenues and operating expenses yield an annual pre-tax cash flow of $50 million, however the plant is projected to operate at 50% capacity in year 2. The 5-year MACRS depreciation schedule will be used for this project. The interest rate (cost of capital) is 13%, and the corporate income tax rate is 21%.

(a) Calculate the simple payback time and the pre-tax return on investment

(b) Complete the values missing in the table.

(c) What is the IRR of this project?

a b Year Capital Investment (MM) Working Capital (MM$) Pre-Tax Cash Flow (MM$) 5-year MACRS Schedule (%) Depreciation Charge (MM$) Taxable Income (MM$) Taxes Due (MM$) After Tax Cash Flow (MM$) Present Value of Cash Flow (MM$) Net Present Value (NPV, MM$)