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 Book income ($ in millions) Book rate of return (%) Economic income ($ in millions) 0 1 2 3 4 5 6 7 8 9 10 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. Assume no growth and competitive spreads. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) ROI %

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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	Book income ($ in millions)	Book rate of return (%)	Economic income ($ in millions)
0
1
2
3
4
5
6
7
8
9
10

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. Assume no growth and competitive spreads. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

ROI

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