Task: Multi-chem Role and Context You are a financial analyst in the capital projects department of Multi-chem, a specia
Posted: Sat Nov 27, 2021 5:22 pm
Task: Multi-chem
Role and Context
You are a financial analyst in the capital projects department
of Multi-chem, a specialty chemicals producer of fire-control
chemicals, additives, and pesticides based in Queensland.
Currently, Multi-chem is small in scale, but embarking on a rapid
expansion and modernization program. It is also expanding its range
of products into dyes, rubber compounds, and water treatment
chemicals. While Multi-chem has a large and expanding capital
budget, it is currently considering which of two possible projects
it should invest in, both of which would be used to manufacture
furfural (an organic compound derived from agricultural
by-products) and furfural-based derivatives to make resins,
urethanes, and refining solvents over a 10-year operating
period.
Scenario
The first project, the Manila Plant, is a proposed new plant in
the Philippines, about 30 km outside the capital. Multi-chem has
been considering this expansion for a number of years and believes
that the combination of low wages, looser environmental protection,
and proximity to its emerging markets in SE Asia will makes this
new plant an attractive addition to its existing facilities.
Specifically, in 2021 the Manila Plant will require the purchase of
land for $2.5 million, with development and construction building
costs of $13.5 million, and plant and equipment of $6 million.
Multi-chem will also need to spend on working capital each year.
The change in net working capital is estimated to be 3% of sales
every year during the life of the project (the exception being the
last year of the project which reverses the sum of all previous
cash flows due to working capital). Sales are estimated to be $48.6
million in 2022, the first year of production, increasing by 12%
per annum after that. The cost of goods sold is 65% of sales. Fixed
costs will be $10 million in 2022, increasing by 5% per year. Both
buildings and plant/equipment will be depreciated straight line to
zero over the 10-year project life. The buildings will have a
salvage value of 20% of cost and the plant and equipment will have
no salvage value. At the end of the project, Multi-chem will
rehabilitate the site and sell the land for light industrial
development for $18.1 million. The company tax rate in the
Philippines is 25%.
The second project, the Cairns Plant, is a modification of an
existing plant Multi-chem already owns in the city of the same name
in north Queensland. The Cairns Plant has been idle for a number of
years, but with renovation would be well suited to furfural
production. If not used for the proposed project, Multi-chem will
lease out the existing plant for $70,000 per year. The estimated
development and construction building costs will be $15 million in
2021 alongside plant and equipment investment of $5
million. Multi-chem will again need to invest in working
capital, thus the change in net working capital is estimated as 4%
of sales every year (the exception being the last year of the
project which reverses the sum of all previous cashflows due to
working capital). Sales will be $45 million in 2022, increasing by
7.25% per annum thereafter. Given the relative geographic isolation
of the plant and the stricter environmental controls given the
proximity to the Great Barrier Reef, the cost of goods sold will be
75% of sales. Fixed costs will be $5 million in 2021, increasing by
5% per year. Both buildings and plant/equipment will again be
depreciated straight line to zero over the 10-year project life.
The buildings will have a salvage value of 30% of cost and the
plant and equipment will have no salvage value. At the end of the
project, the Townsville Plant will again revert to being idle
awaiting potential future developments at no cost. The company tax
rate in Australia is 30%.
Task
Provide a report to Multi-chem’s CFO, Ms. Mary Miller,
recommending which of these two mutually exclusive projects
Multi-chem should invest in, if any. Your recommendation should be
supported by appropriate calculations. Assume Multi-chem has a cost
of capital of 12.5% for domestic projects and 16% for international
projects. (NPV calculation)
Role and Context
You are a financial analyst in the capital projects department
of Multi-chem, a specialty chemicals producer of fire-control
chemicals, additives, and pesticides based in Queensland.
Currently, Multi-chem is small in scale, but embarking on a rapid
expansion and modernization program. It is also expanding its range
of products into dyes, rubber compounds, and water treatment
chemicals. While Multi-chem has a large and expanding capital
budget, it is currently considering which of two possible projects
it should invest in, both of which would be used to manufacture
furfural (an organic compound derived from agricultural
by-products) and furfural-based derivatives to make resins,
urethanes, and refining solvents over a 10-year operating
period.
Scenario
The first project, the Manila Plant, is a proposed new plant in
the Philippines, about 30 km outside the capital. Multi-chem has
been considering this expansion for a number of years and believes
that the combination of low wages, looser environmental protection,
and proximity to its emerging markets in SE Asia will makes this
new plant an attractive addition to its existing facilities.
Specifically, in 2021 the Manila Plant will require the purchase of
land for $2.5 million, with development and construction building
costs of $13.5 million, and plant and equipment of $6 million.
Multi-chem will also need to spend on working capital each year.
The change in net working capital is estimated to be 3% of sales
every year during the life of the project (the exception being the
last year of the project which reverses the sum of all previous
cash flows due to working capital). Sales are estimated to be $48.6
million in 2022, the first year of production, increasing by 12%
per annum after that. The cost of goods sold is 65% of sales. Fixed
costs will be $10 million in 2022, increasing by 5% per year. Both
buildings and plant/equipment will be depreciated straight line to
zero over the 10-year project life. The buildings will have a
salvage value of 20% of cost and the plant and equipment will have
no salvage value. At the end of the project, Multi-chem will
rehabilitate the site and sell the land for light industrial
development for $18.1 million. The company tax rate in the
Philippines is 25%.
The second project, the Cairns Plant, is a modification of an
existing plant Multi-chem already owns in the city of the same name
in north Queensland. The Cairns Plant has been idle for a number of
years, but with renovation would be well suited to furfural
production. If not used for the proposed project, Multi-chem will
lease out the existing plant for $70,000 per year. The estimated
development and construction building costs will be $15 million in
2021 alongside plant and equipment investment of $5
million. Multi-chem will again need to invest in working
capital, thus the change in net working capital is estimated as 4%
of sales every year (the exception being the last year of the
project which reverses the sum of all previous cashflows due to
working capital). Sales will be $45 million in 2022, increasing by
7.25% per annum thereafter. Given the relative geographic isolation
of the plant and the stricter environmental controls given the
proximity to the Great Barrier Reef, the cost of goods sold will be
75% of sales. Fixed costs will be $5 million in 2021, increasing by
5% per year. Both buildings and plant/equipment will again be
depreciated straight line to zero over the 10-year project life.
The buildings will have a salvage value of 30% of cost and the
plant and equipment will have no salvage value. At the end of the
project, the Townsville Plant will again revert to being idle
awaiting potential future developments at no cost. The company tax
rate in Australia is 30%.
Task
Provide a report to Multi-chem’s CFO, Ms. Mary Miller,
recommending which of these two mutually exclusive projects
Multi-chem should invest in, if any. Your recommendation should be
supported by appropriate calculations. Assume Multi-chem has a cost
of capital of 12.5% for domestic projects and 16% for international
projects. (NPV calculation)