Delaware Chemicals is considering the installation of a computer process control system in one of its processing plants. This plant is used for 3,000 operating hours per year, to produce a proprietary demulsification chemical. The annual production of the demulsification chemical amounts to 25,000 kilograms per year, and it sells for $10 per kilogram. The proposed computer process control system will cost $150,000 and is expected to provide specific benefits in the production of the demulsification chemical as follows:
- First, the selling price of the product could be increased by $2 per kilogram because the product would be of higher purity, which translates into better demulsification performance.
- Second, production volumes would increase by 5,000 kilograms per year as a result of higher reaction yields, without any increase in requirements for raw material quantities or production time.
- Finally, the number of process operators could be reduced by one per shift, which represents a savings of $10 per hour. The new control system would result in additional maintenance costs of $80,000 per year and has an expected useful life of eight years.
a) Identify the cash inflows, outflows and determine the net cash flows over the life of the project.
b) How long does it take to recover the investment?
c) If the firm's interest rate is 15%, what would be the discounted-payback period for this project?
d) Determine the net gain for the company from this project assuming an interest rate of 15%.