New Energy is evaluating a new biofuel facility. The plant would cost $4,000 million to build and has the potential to produce up to 40 million barrels of synthetic oil a year. The product is a close substitute for conventional oil and would sell for the same price. The market price of oil currently is fluctuating around $100 per barrel, but there is considerable uncertainty about future prices. Variable costs for the organic inputs to the production process are estimated at $82 per barrel and are expected to be stable. In addition, annual upkeep and maintenance expenses on the facility will be $100 million regardless of the production level. The plant has an expected life of 15 years, and it can be fully depreciated immediately. Salvage value net of cleanup costs is expected to be negligible. Demand for the product is difficult to forecast. Depending on consumer acceptance, sales might range from 25 million to 35 million barrels annually. The discount rate is 12%, and New Energy's tax bracket is 21%. Required: a-1. Find the project's NPV for the following combinations of oil price and sales volume. a-2. Which source of uncertainty seems most important to the success of the project? b. At an oil price of $100, what level of annual sales, maintained over the life of the plant, is necessary for NPV break-even? c. At an oil price of $100, what is the accounting break-even level of sales in each year? d. If each of the scenarios in the grid in part (a) is equally likely, what is the NPV of the facility? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Req C Req D Find the project's NPV for the following combinations of oil price and sales volume. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Negative amount should be indicated by a minus sign. Annual Sales 25 million barrels 30 million barrels 35 million barrels Oil Price $80 per barrel $100 per barrel $120 per barrel 2,000.00 2,400.00

New Energy is evaluating a new biofuel facility. The plant would cost $4,000 million to build and has the potential to produce up to 40 million barrels of synthetic oil a year. The product is a close substitute for conventional oil and would sell for the same price. The market price of oil currently is fluctuating around $100 per barrel, but there is considerable uncertainty about future prices. Variable costs for the organic inputs to the production process are estimated at $82 per barrel and are expected to be stable. In addition, annual upkeep and maintenance expenses on the facility will be $100 million regardless of the production level. The plant has an expected life of 15 years, and it can be fully depreciated immediately. Salvage value net of cleanup costs is expected to be negligible. Demand for the product is difficult to forecast. Depending on consumer acceptance, sales might range from 25 million to 35 million barrels annually. The discount rate is 12%, and New Energy's tax bracket is 21%. Required: a-1. Find the project's NPV for the following combinations of oil price and sales volume. a-2. Which source of uncertainty seems most important to the success of the project? b. At an oil price of $100, what level of annual sales, maintained over the life of the plant, is necessary for NPV break-even? c. At an oil price of $100, what is the accounting break-even level of sales in each year? d. If each of the scenarios in the grid in part (a) is equally likely, what is the NPV of the facility? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Req C Req D Find the project's NPV for the following combinations of oil price and sales volume. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Negative amount should be indicated by a minus sign. Annual Sales 25 million barrels 30 million barrels 35 million barrels Oil Price $80 per barrel $100 per barrel $120 per barrel 2,000.00 2,400.00

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 10P: Hemmingway, Inc. is considering a $5 million research and development (R&D) project. Profit...

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