Problem #4: (Incremental ROI and DCFRR Analysis – Alternative Investments) Economic details are set
Problem #4: (Incremental ROI and DCFRR Analysis – Alternative Investments) 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 95 99.5 4000 4000 900 600 50 50 Purity Plant capacity (ton/yr) Product value ($/ton of product) Fixed Capital cost ($/1000) Raw material (S/ton product) Energy cost (S/ton product) Labor cost ($) Maintenance Overhead ($) Salvage value 25 16,000 10% of capital 40,000 40,000 7 years 0.22 25,000 10% of capital 50,000 60,000 10 years Plant life DCFRR 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 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)?
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