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Problem 11-19 Economic rents

Consider the following information given below:

($ in millions except as noted)	Year 0		Year 1		Year 2		Year 3		Year 4		Year 5-10
Investment		100
Production (millions of pounds per year)		0		0		42		84		84		84
Spread ($ per pound)		1.22		1.22		1.22		1.22		1.22		0.97
Net revenues		0		0		51		102		102		81
Production costs		0		0		32		32		32		32
Transport		0		0		6		10		10		10
Other costs		0		22		22		22		22		22
Cash flow		100		22		8.76		38.48		38.48		17.48
NPV (at r = 8%) = 9.65

Production and transport costs are variable costs while other costs are fixed.

a. Calculate the NPV of the proposed polyzone project, if the spread in year 4 holds at $1.22 per pound and whats the right management decision? b. Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 42 million pounds in year 1 rather than year 2 and whats the right management decision? c. Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technological advance that reduces its annual production costs to $27 million. Competitors production costs do not change and whats the right management decision?

Problem 11-19 Economic rents Consider the following information given below: Year 1 Year 2 Year 3 Year 4 Year 5-10 Year o 100 0 1.22 0 1.22 0 0 ($ in millions except as noted) Investment Production (millions of pounds per year) Spread ($ per pound) Net revenues Production costs Transport Other costs Cash flow NPV (at r = 8%) = -9.65 0 42 1.22 51 32 6 22 -8.76 84 1.22 102 32 10 22 38.48 84 1.22 102 32 10 22 38.48 84 0.97 81 32 10 22 17.48 0 0 -100 22 -22 Production and transport costs are variable costs while other costs are fixed. a. Calculate the NPV of the proposed polyzone project, if the spread in year 4 holds at $1.22 per pound and what's the right management decision? b. Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 42 million pounds in year 1 rather than year 2 and what's the right management decision? c. Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technological advance that reduces its annual production costs to $27 million. Competitors' production costs do not change and what's the right management decision? Problem 11-19 Economic rents Consider the following information given below: Year 1 Year 2 Year 3 Year 4 Year 5-10 Year o 100 0 1.22 0 1.22 0 0 ($ in millions except as noted) Investment Production (millions of pounds per year) Spread ($ per pound) Net revenues Production costs Transport Other costs Cash flow NPV (at r = 8%) = -9.65 0 42 1.22 51 32 6 22 -8.76 84 1.22 102 32 10 22 38.48 84 1.22 102 32 10 22 38.48 84 0.97 81 32 10 22 17.48 0 0 -100 22 -22 Production and transport costs are variable costs while other costs are fixed. a. Calculate the NPV of the proposed polyzone project, if the spread in year 4 holds at $1.22 per pound and what's the right management decision? b. Calculate the NPV of the proposed polyzone project, if the U.S. chemical company can start up polyzone production at 42 million pounds in year 1 rather than year 2 and what's the right management decision? c. Calculate the NPV of the proposed polyzone project, if the U.S. company makes a technological advance that reduces its annual production costs to $27 million. Competitors' production costs do not change and what's the right management decision

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