Question

The plant investment, expected to amount to $200 million, has been planned for 2017; however, it is delayed due to the economic downturn in construction. When the plant is completed and operating at full capacity, based upon the projected needs and cost per metric ton, it is possible that the plant could generate as much as $50,000,000 annually in revenue.
All analysis will use a planning horizon of 5 years commencing when the plant begins operation.
Delays beyond the anticipated implementation year of 2017 will require additional money to construct the factory. Assuming that the cost of money is 10% per year, compound interest, draw the cash flow diagram and determine the following:
a) The equivalent investment needed if the plant is built in 2020.
b) The equivalent investment needed had the plant been constructed in the year 2013.
c) Will the initial investment be recovered over the 5-year horizon with the time value of money considered?

Answer 1

a) 3 years delay

The equivalent investmen=x

$x= 200 million (1+0.1)^3=266.2 million$

b) 4 years ahead of schedule

$x=200 million/(1+0.1)^4=136.6 million$

c) The cost of investment money=y

$y=200 million*(1+0.1)^5=322.102 million$

The cost of incom money=z

$z=50 million*(1+0.1)^4+50 million*(1+0.1)^3+50 million*(1+0.1)^2+50 million*(1+0.1)+50 million=305.255 million$

322.102 bigger 305.255 It is mean initial investment will not recover