Problem #4: (Alternative Investments - Incremental ROI and DCFRR Analysis) Economic details are set out below for the manufacture of several grades of the same chemical. Higher purities command a premium price, but costs are higher. Item Process A Process B 99.5 4000 Y Purity Plant capacity (tonly) Product value (S/ton of product) Fixed Capital cost (5/1000) Raw material (S/ton product) Energy cost (5/ton product) Labor cost (5) 900 50 25 95 4000 600 50 15 16,000 10% of capital 40.000 40,000 7 years 0.22 25,000 Maintenance 10% of capital 50,000 60.000 Overhead (5) Salvage value Plant life DCFRR 10 years 0.20 Common data Working Capital = 0 Depreciation = Straight-Line Dep. With life of 7 im = 0.15 Tax Rate=0.35 Start-up = 0.0 1) ii) What are the product prices X and Y for processes A and B? Which process would you choose if you used incremental ROI (AROI) as the criterion? Determine whether we should choose process A or B. What is incremental DCFRR (ADCFRR)? ) DCFRR: Discounted Cash Flow Rate of Return im: Minimum effective interest rate A: Incremental Problem #4: (Alternative Investments - Incremental ROI and DCFRR Analysis) Economic details are set out below for the manufacture of several grades of the same chemical. Higher purities command a premium price, but costs are higher. Item Process A Process B 99.5 4000 Y Purity Plant capacity (tonly) Product value (S/ton of product) Fixed Capital cost (5/1000) Raw material (S/ton product) Energy cost (5/ton product) Labor cost (5) 900 50 25 95 4000 600 50 15 16,000 10% of capital 40.000 40,000 7 years 0.22 25,000 Maintenance 10% of capital 50,000 60.000 Overhead (5) Salvage value Plant life DCFRR 10 years 0.20 Common data Working Capital = 0 Depreciation = Straight-Line Dep. With life of 7 im = 0.15 Tax Rate=0.35 Start-up = 0.0 1) ii) What are the product prices X and Y for processes A and B? Which process would you choose if you used incremental ROI (AROI) as the criterion? Determine whether we should choose process A or B. What is incremental DCFRR (ADCFRR)? ) DCFRR: Discounted Cash Flow Rate of Return im: Minimum effective interest rate A: Incremental