Concept explainers
a)
To determine:
a)
Explanation of Solution
Given information:
Annual output is 100,000 tons
Operating cost are $0.90 per ton
Sale price is $1 per ton.
Cost of capital is 10%.
Calculation of net present value:
Net present value of such plant is probably going to zero, as a result of industry is competitive and, after two years no company would enjoy the technical benefits.
The present value of each of these plants would be $100,000 the cost is $100,000 and net present value is zero.
b)
To determine: Price of polysyllabic acid in 3 year and beyond
b)
Explanation of Solution
Calculation of price by using net present value of new plant:
Therefore, the price of polysyllabic acid is $0.95
c)
To determine: Present value when the scrap value is $40,000 and $80,000 in 2 year.
c)
Explanation of Solution
Calculation of net present value at year 2:
Therefore, when the existing plant can be scrapped at t=2 as long as the value of scrap at that point exceeds $50,000 that it’s expected to be.
d)
To discuss: Whether company U operate plants profitably after year 2 when plant is fully
d)
Explanation of Solution
Person X views that, company doesn’t operate them in profitably because book value is irrelevant and the net present value of the existing plant is negative after the second year.
e)
To discuss: Whether company scrap the new plant in year 2
e)
Explanation of Solution
Person X views that, company should scrap the newly purchased plant in year 2 because sunk costs are irrelevant and the net present value of the existing plant is negative after the second year.
f)
To determine: Net present value.
f)
Explanation of Solution
Company P’s project causes temporary excess capacity. Therefore the price for future 2 years should be specified the prevailing plant owners are indifferent between scrapping currently and scrapping at the end of 2 year.
Scrap value is $60,000 and also it is equal to present values of future cash flows. Therefore,
Calculation of net present value:
By using this value of price we can calculate the present value of new plant,
Calculation of present value of new plant:
Therefore present value of new plant is $3,470.
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Chapter 11 Solutions
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