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Homework answers / question archive / Use the cash flows and competitive spreads shown in the table below

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

Finance

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

    ($ millions)  
  Year 0 Year 1 Year 2 Years 3–10
Investment 100      
Production (millions of pounds per year) 0 0 51 91
Spread ($ per pound) 1.06 1.06 1.06 1.06
Net revenues 0 0 54.06 96.46
Production costs 0 0 41.00 41.00
Transport 0 0 0 0
Other costs 0 31 31 31
         
Cash flow –100 31 –17.94 –24.46
         
NPV (at r = 9%) = 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 9%. (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             %

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