MGFB10H3 Final: (3) B09+Test+08+Fall
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Use the cash flows and competitive spreads shown in the table below.
($ millions) | ||||
Year 0 | Year 1 | Year 2 | Years 3รขยย10 | |
Investment | 130 | |||
Production (millions of pounds per year) | 0 | 0 | 54 | 94 |
Spread ($ per pound) | 1.09 | 1.09 | 1.09 | 1.09 |
Net revenues | 0 | 0 | 58.86 | 102.46 |
Production costs | 0 | 0 | 44.00 | 44.00 |
Transport | 0 | 0 | 0 | 0 |
Other costs | 0 | 34 | 34 | 34 |
Cash flow | รขยย130 | 34 | รขยย19.14 | รขยย24.46 |
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: | 0 | 1 | 2 | 3 | 4 | 5 |
Book income ($) | ||||||
Book rate of return (%) | ||||||
Economic income ($) | ||||||
6 | 7 | 8 | 9 | 10 | |
Book income ($) | |||||
Book rate of return (%) | |||||
Economic income ($) | |||||
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. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
ROI %