Question
Use the cash flows and competitive spreads shown in the table below.
|
|
($ millions) |
|
|
Year 0 |
Year 1 |
Year 2 |
Years 3-10 |
| Investment |
190 |
|
|
|
| Production (millions of pounds per year) |
0 |
0 |
49 |
89 |
| Spread ($ per pound) |
1.04 |
1.04 |
1.04 |
1.04 |
| Net revenues |
0 |
0 |
50.96 |
92.56 |
| Production costs |
0 |
0 |
39.00 |
39.00 |
| Transport |
0 |
0 |
0 |
0 |
| Other costs |
0 |
29 |
29 |
29 |
|
|
|
|
|
| Cash flow |
-190 |
29 |
-17.04 |
-24.56 |
|
|
|
|
|
| NPV (at r = 6%) = 0 |
|
|
|
|
|
Assume the dividend payout ratio each year is 100%.
a. Calculate the year-by-year book and economic profitability for investment in polyzone production. Assume straight-line depreciation over 10 years and a cost of capital of 6%.
(Negative answers should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your income answers in millions rounded to 2 decimal places and enter the rate of return as a percent rounded to 2 decimal places.)
| Period: |
0 |
1 |
2 |
3 |
4 |
5 |
| Book income ($) |
|
|
|
|
|
|
| Book rate of return (%) |
|
|
|
|
|
|
| Economic income ($) |
|
|
|
|
|
|
|
|
6 |
7 |
8 |
9 |
10 |
| Book income ($) |
|
|
|
|
|
| Book rate of return (%) |
|
|
|
|
|
| Economic income ($) |
|
|
|
|
|
|
b-1. What is the economic rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Economic rate of return %
b-2. Now compute the steady-state book rate of return (ROI) for a mature company producing polyzone. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
ROI %