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ChemMet Ltd wants to expand their business by making a product with the by-product
generated from their operations. Currently they sell this by-product (500 000 kg/ year) at
a price of R1.55/ kg to Civil Ltd. The company did some research and came up with three
possible scenarios: Keep selling to Civil Ltd, convert the by-product to product A using
Process A or convert the by-product to product B using Process B.
Process A requires R350 000 investment initially. It can produce product A at a cost of R5
per kilogram feed material at a yield of 1.5 kg A per kg by-product. The fixed cost of the
process is R120 000 per month. The market price for product A is R9.30/kg.
Process B requires R255 000 investment initially. It can produce product B at a cost of
R4.55 per kilogram feed material at a yield of 1.65 kg B per kg by-product. The fixed cost
of the process is R125 000 per month. The market price for product A is R 8.80/kg.
You have been asked to suggest the best alternative and can use the following assumptions
in your calculations.
The following additional information is provided:
 The duration of time in which you want to see a return on investment is 5 years
 In order to even consider not just selling the by-product, you need to make a return
on investment of minimum 20% with the extra profit after tax that you will make
each year from producing and selling product A or B.
 Tax rate per year is 28% for all three scenarios
 The by-product costs can be assumed to be zero if used in Process A and B.
 Depreciation is ignored for purposes of this calculation
 The only returns from these processes will be the profits after tax which can be
assumed to escalate by 5% over the years
 Capital is required at the beginning of year 1 and production starts immediately at
75% capacity in year 1 followed by 100% thereafter

6 days ago

anonymous
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