Purchase Solution

Project Valuation of Chemical Compound

Not what you're looking for?

Ask Custom Question

Please see the attached file.
HMG is considering the manufacture of a new chemical compound that is used to make high-pressure plastic containers. An investment of $4 million in plant and equipment is required. The firm estimates the investment will have a five-year
life, using straight-line depreciation toward a zero salvage value. However, the investment has an anticipated salvage value equal to 10% of its original cost.
The projected numbers of pounds of the chemical compound that HMG expects to sell over the five-year life of the project are as follows (in millions): 1, 1.5, 3, 3.5 and 2.
To operate the new plant, HMG estimates that it will incur additional fixed cash operating expenses of $1 million per year and variable operating expenses equal to 45% of revenues. Furthermore, HMG estimates that it will need to invest 10%
of the anticipated increase in revenues each year in net working capital. The price per pound for the new compound is expecting to be $2 in years 1 and 2, then $2.50 per pound in years 3 through 5. HMG's tax rate is 38% and it requires a 15%
rate of return on its new product investments.
Exhibit P2-5.1 contains projected cash flows for the entire life of the proposed investment. Note that investment cash flow is derived from the additional revenues and costs associated with the proposed investment.
a. Does this project create shareholder value?
b. If so, how much?
c. Should HMG undertake the investment?

d.What if the esitmate of the variable costs were to rise to 55%?
e. Would this affect your decision?

Attachments
Purchase this Solution

Solution Summary

The solution explains some questions relating to project valuation

Purchase this Solution


Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.