Question

The total capital investment for a conventional chemical plant is $1.5 million and the plant produces 3 million kg of product annually. The selling price of the product is $0.82/kg. Working capital can be assumed 15% of TCI . The raw material cost for the product are $0.09/kg of product , labor and maintenance cost, $0.08/kg of product, utilities , $0.05/kg of product, and overhead and other fix costs, $0.008/kg of product. General expenses other than depreciation are 5% of the total product cost. Average depreciation can be considered as $125,000. Estimate the following:

●Total product cost per kg of product

●Total product cost per year

●Profit before taxes (gross profit)

●Profit after taxes at 35% (Net profit)

●Return on Investment (ROI) and the payback period (PBP)

Answer 1

Total capital investment (TCI) = $1.5 million = $ 1,500,000

Plant output = 3 million kg = 3,000,000 kg

Selling price of the product =  $0.82/kg

Total sales value = 3,000,000 kg * $0.82/kg = $ 2,460,000

Calculation of cost of product:

Working capital = 15% * $ 1,500,000 = $ 225,000 (in the absence of cost of capital, the effect of working capital can't be considered)

raw material cost = $0.09/kg

labor and maintenance cost = $0.08/kg

utilities = $0.05/kg

overhead and other fix costs = $0.008/kg

Total product cost per kg of product = $ 0.09 + 0.08 + 0.05 + 0.008 = $ 0.228/ kg of product

Total product cost per year = Total product cost per kg of product * amount of product produced in a year in kg

= $ 0.228/ kg of product * 3,000,000 kg = $ 684,000

Profit before taxes (gross profit)

= Sales - Total product cost - General expenses other than depreciation - Depreciation

= $ 2,460,000 - $ 684,000 - 0.05 * $ 684,000 - $125,000

= $1,616,800

Profit after taxes at 35% (Net profit)

= Profit before taxes * (1- Tax rate)

= $1,616,800* (1 - 35%)

= $ 1,050,920

Return on Investment (ROI) and the payback period (PBP)

ROI = Profit after tax / Capital invested

= $ 1,050,920 / $ 1,500,000

= .7006 = 70.06%

PBP = Total investment/ Profit after taxes

= $ 1,500,000/ $ 1,050,920

= 1.43 years