The feasibility test has revealed that the project can produce 340,000 kg per year of an element
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Question:
Fixed cost: $400,000
Variable Cost: $500,00
The project's initial cost and the element X's market selling price would be unclear. The project's capital investment might total $10 million, with cost overruns of 10% to 15% probable. For tax purposes, we can assume that the capital investment can be written off over a 7-year period using the straight-line approach and that the tax rate is 35%.
The project can also be carried out in a different fashion with a potential capital outlay that would be $1.7 million lower. However, utilizing this method would boost the expected operating cost's fixed cost to $850,000 year, leading to an increase in operating costs overall.
However, if adopted, a new government regulation for this project will add an additional $1.5 million to the capital investment.
The cost of element X is $10,000 (per 1,000 kg) right now, but nobody can predict what it will cost in the future. The pessimistic estimate is only approximately $7,500, whereas the optimistic estimate is $10,000 (per 1,000 kg) (per 1,000 kg). The financial analyst's opinion on the price in either one is not particularly strong. The best guess is that the price would simply rise along with inflation, which is currently running at around 3.5%, and that operating costs will also rise along with inflation.
Similar projects like this one in the market demand a minimum nominal rate of return of 14%.
The Financial analyst must use NPV analysis to assess this project, beginning with the base-case scenario and doing sensitivity and break-even analyses under other scenarios as necessary.
What forecasts or eventualities frighten the financial analyst the most?
Where would more details be most useful?
Related Book For
Thermodynamics An Engineering Approach
ISBN: 978-0073398174
8th edition
Authors: Yunus A. Cengel, Michael A. Boles
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