Engineering Economics

Project analyses
Student Name:
Number:
Hassan Saeed Al-Qadheeb
210003380
Mohammed Al-Mulhim
210015326
Hassan Al-Busaleh
210022310
Ahmad Al-Khalfan
210033361
Ali Ibrahim Al-Haiz
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

Year

sales LB/YR

Selling
$/LB
0

price operating
price $/LB
0

15000000

0.28

0.16

17000000

0.28

0.16

19000000

0.26

0.15

20000000

0.27

0.15

20000000

0.28

0.15

20000000

0.29

0.16

18000000

0.3

0.17

17000000

0.3

0.17

15000000

0.28

0.18

10

13000000

0.28

0.18

expenses

Results:
(a) we have to get the net cash flow from the given
And in details :
D=I-S/N
because we dont 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)
Cash Flow
(CF)
Depreciation (D)

Operations

Cash Operating
Expenses (C)

Operating
income

Gross
income

Net Income after

Taxes
Tax income (t)

Table 2: calculating R and C:

year

cash operating expenses

Revenue

operating income

Y
0

C
0

R
0

(R-C)
0

2400000

4200000

1800000

2720000

4760000

2040000

2850000

4940000

2090000

3000000

5400000

2400000

3000000

5600000

2600000

3200000

5800000

2600000

3060000

5400000

2340000

2890000

5100000

2210000

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
0

(R-C)
0

D
0

(R-C-D)
0

t
0

t*(R-C-D)
0

(R-C-D)-t(R-C-D)
0

1800000

600000

1200000

0.46

552000

648000

2040000

600000

1440000

0.46

662400

777600

2090000

600000

1490000

0.46

685400

804600

2400000

600000

1800000

0.46

828000

972000

2600000

600000

2000000

0.46

920000

1080000

2600000

600000

2000000

0.46

920000

1080000

2340000

600000

1740000

0.46

800400

939600

2210000

600000

1610000

0.46

740600

869400

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

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

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

0
1
2
3
4
5
6
7
8
9
10

0
648000
777600
804600
972000
1080000
1080000
939600
869400
486000
378000

0
648000
1377600
1404600
1572000
1680000
1680000
1539600
1469400
1086000
978000

net cash flow

previous cash flow + cash
flow
-6000000
-5352000
-3974400
-2569800
-997800
682200
2362200
3901800
5371200
6457200
7435200

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

-----------------------------------------------------------------Table5: Net Cash Flow

year

Net cash flow

-1.5
0
1
2
3
4
5
6
7
8
9
10

0
-6000000
-5352000
-3974400
-2569800
-997800
682200
2362200
3901800
5371200
6457200
7435200

Net cash flow

Cumulative Cash Position Chart

Million

10

Life of Project Earning

8
6

Net Profit
over total life
of project

4
2

Total capital
investment

0
-3

-2

-1

-2
-4

Payback period

-6
-8

Years

Figure2: Cumulative Cash Position Chart.

10

11

(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

$ 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