Consider the following two new chemical plants, each with an initial fixed capit
ID: 2785757 • Letter: C
Question
Consider the following two new chemical plants, each with an initial fixed capital investment (year 0) of $15x10^6 . Their cash flows are as follows:
1
a. Calculate the NPV of both plants for interest rates of 6% and 18%. Which plant do you recommend? Explain your results.
b. Calculate the Discounted Cash Flow Rate of Return for Each Plant. Which plant do you recommend? Why?
c. Calculate the nondiscounted payback period (PBP) for each plant. Which plant do you recommend? Why? d. Explain any differences in your answers to Parts (a), (b) and (c).
Process 1 Process 2 Year millions/ year millions/ year1
3 5 2 8 5 3 7 5 4 5 5 5 2 2Explanation / Answer
a) NPV can be calculated using NPV function on a calculator or excel.
We select process 1 as it has higher NPV than process 2 at both rates.
b) Rate of return can be calculated using IRR function on a calculator or excel
As ROR is higher for process 1, we select it.
c) Payback period is the no. of years it takes to recover investment. As process 1 as lower PBP, we select process 1.
1 2 -15 -15 3 5 8 5 7 5 5 5 2 2 NPV (6%) $6.28 $3.82 NPV (18%) $1.00 -$0.68 ROR 21.0% 15.8% PBP 2.57 3.00