Contemporary Engineering Economics 6th Edition by Chan Park

تمرين 15

Champion Chemical Corporation is planning to expand one of its propylene manufacturing facilities. At n =0, a piece of property costing $1.5 milion must be purchased to build a plant. The building, which needs to be expanded during 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 costs. Once the building becomes operational, it will generate revenue in the amount of $3.5 million during the first operating year. This will increase at the annual rate of 5% over the previous year's revenue for the next nine years. After 10 years, the sales revenue will stay constant for another three years before the operation is phased out. (It will have a project life of 13 years after construction.) The expected salvage value of the land at the end of the project's life 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 approximately 40% of the sales revenue each year. What is the IRR for this investment If the company's MARR is 15%, determine whether the investment is a good one. (Assume that all figures represent the effect of the income tax.)