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