Champion Chemical Corporation is planning to expand one of its propylene manufacturing facilities. At n = 0, a piece of property costing $1.5 million must be purchased for the expanded plant site. The building, which needs to be expanded at the beginning of the first year, costs $3 million. At the end of the first year, the company needs to spend about $4 million on equipment and other start-up needs. Once the plant becomes operational, it will generate revenue in the amount of $3.5 million during the first operating year. This amount will increase at an annual rate of 5% over the previous year's revenue for the next nine years. After l 0 years. the sales revenue will stay constant for another 3 years before the operation is phased out. (The plant will have a project life of 13 years after construction.) The expected salvage value of the land would be about $2 million, the building about $1.4 million, and the equipment about $500,000. The annual operating and maintenance costs are estimated to be about 40% of the sales revenue each year. What is the IRR for this investment? If the company's MARR is 15%, determine whether this expansion is a good investment. (Assume that all figures include the effect of income tax.)
Champion Chemical Corporation is planning to expand one of its propylene manufacturing facilities. At n = 0, a piece of property costing $1.5 million must be purchased for the expanded plant site. The building, which needs to be expanded at the beginning of the first year, costs $3 million. At the end of the first year, the company needs to spend about $4 million on equipment and other start-up needs. Once the plant becomes operational, it will generate revenue in the amount of $3.5 million during the first operating year. This amount will increase at an annual rate of 5% over the previous year's revenue for the next nine years. After l 0 years. the sales revenue will stay constant for another 3 years before the operation is phased out. (The plant will have a project life of 13 years after construction.) The expected salvage value of the land would be about $2 million, the building about $1.4 million, and the equipment about $500,000. The annual operating and maintenance costs are estimated to be about 40% of the sales revenue each year. What is the IRR for this investment? If the company's MARR is 15%, determine whether this expansion is a good investment. (Assume that all figures include the effect of income tax.)
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