Engineering Economics

Project analyses

Student Name:

Number:

Hassan Saeed Al-Qadheeb Mohammed Al-Mulhim Hassan Al-Busaleh Ahmad Al-Khalfan Ali Ibrahim Al-Haiz

210003380

210015326

210022310

210033361

210024642

Department:

Electrical

Mechanical

Mechanical

Chemical

Mechanical

“APPLYING ECONOMIC ANALYSIS”

Problem Statement:

7.4: The star Chemical Co. manufactures specialty products. The land for a proposed expenditure may be considered negligible ,but the fixed capital investment is estimated to $6,000,000. The equipment is

to be purchased and installed over an 18-month period before startup.

For this project time zero may be assumed at startup. It is assumed that the Straight line 10-year depreciation rules apply. The projected sales, selling price, and cash operating expenses are tabulated below.

If the federal income tax rate is 46%, provide the following for

management's consideration:

a. a tabulated cash flow summary

b. a cumulative cash position chart, labeling all lines on the chart

c. a cumulative cash position at the end of the project (10 years)

Given:

Table1: projected sales and cash operating expenses

		Selling	price	operating	expenses
Year	sales LB/YR	$/LB		price $/LB
0	0	0		0
1	15000000 0.28			0.16
2	17000000 0.28			0.16
3	19000000 0.26			0.15
4	20000000 0.27			0.15
5	20000000 0.28			0.15
6	20000000 0.29			0.16
7	18000000 0.3			0.17
8	17000000 0.3			0.17
9	15000000 0.28			0.18
10	13000000 0.28			0.18

Results:

(a) we have to get the net cash flow from the given

And in details :

D=I-S/N

because we

don’t have salvage value , we can get

the depreciation by this relation D = I/N (straight line method) So , D = $6000,000/10= $600,000

Where ( I is the capital investment )

Tax rate = 46%

Cash Flow Diagram

Revenue (R)

Operations

Cash Operating

Expenses (C)

Cash Flow

(CF)

Operating

income

Depreciation (D)

Gross

income

Net Income after

Taxes

Tax income (t)

Table 2: calculating R and C:

year

cash operating expenses

Revenue

operating income

Y

C

R

(R-C)

0

0

0

0

1

2400000

4200000

1800000

2

2720000

4760000

2040000

3

2850000

4940000

2090000

4

3000000

5400000

2400000

5

3000000

5600000

2600000

6

3200000

5800000

2600000

7

3060000

5400000

2340000

8

2890000

5100000

2210000

9

2700000

4200000

1500000

10

2340000

3640000

1300000

Table3: Calculating the cross income, tax income and net income after taxes.

year

operating income

Depreciation

cross income

tax

tax income

net income after taxes

Y

(R-C)

D (R-C-D)

t

t*(R-C-D)

(R-C-D)-t(R-C-D)

0

0 0

0 0

0

0

1

1800000

600000

1200000

0.46

552000

648000

2

2040000

600000

1440000

0.46

662400

777600

3

2090000

600000

1490000

0.46

685400

804600

4

2400000

600000

1800000

0.46

828000

972000

5

2600000

600000

2000000

0.46

920000

1080000

6

2600000

600000

2000000

0.46

920000

1080000

7

2340000

600000

1740000

0.46

800400

939600

8

2210000

600000

1610000

0.46

740600

869400

9

1500000

600000

900000

0.46

414000

486000

10

1300000

600000

700000

0.46

322000

378000

Table4: calculating the net cash flow.

year

net income after

taxes

Cash Flow

net cash flow

Y

(R-C-D)-t(R-C-D)

[(R-C-D)-t(R-C-D)] + D

previous cash flow + cash

flow

0

0 0

-6000000

1

648000

648000

-5352000

2

777600

1377600

-3974400

3

804600

1404600

-2569800

4

972000

1572000

-997800

5

1080000

1680000

682200

6

1080000

1680000

2362200

7

939600

1539600

3901800

8

869400

1469400

5371200

9

486000

1086000

6457200

10

378000

978000

7435200

(b) we can plot the cumulative cash position chart using the data in table5. See figure2.

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Table5: Net Cash Flow

year	Net cash flow
-1.5	0
0	-6000000
1	-5352000
2	-3974400
3	-2569800
4	-997800
5	682200
6	2362200
7	3901800
8	5371200
9	6457200
10	7435200

Years

Cumulative Cash Position Chart

10

Life of Project Earning

8

6

4

Net Profit

over total life

of project

2

0

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

-2

-4

-6

Payback period

-8

Net cash flow

Total capital

investment

Million

Figure2: Cumulative Cash Position Chart.

(c.) a cumulative cash position at the end of the project

(10 years):

------------------------------------------------------------------

The cumulative cash position at the end of the project = $ 7435200 And the payback period is: from net cash flow table :

	4 $ -997800
	5 $ 682200

f(x)+slope(N-x)=0

-997800+ m(N-4)=0 m=(682200-(-997800))/(5-4) = 1680000 so, -997800+ 1680000(N-4)=0 = -997800+1680000*N – 1680000*4=0 = 1680000*N = 997800+(1680000*4) Payback period N =(997800 +(1680000*4))/1680000

Payback period = 4.593928571

The end