Calculate the economic rate of return

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Reference no: EM132036219

Reference no: EM132036219

Assignment Help Financial Management

Question

Use the cash flows and competitive spreads shown in the table below.

		($ millions)
	Year 0	Year 1	Year 2	Years 3-10
Investment	190
Production (millions of pounds per year)	0	0	49	89
Spread ($ per pound)	1.04	1.04	1.04	1.04
Net revenues	0	0	50.96	92.56
Production costs	0	0	39.00	39.00
Transport	0	0	0	0
Other costs	0	29	29	29

Cash flow	-190	29	-17.04	-24.56

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.)

	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 %

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Book income ($)

Book rate of return (%)

Economic income ($)