Estimate the selling price per pound of product
Econometrics
A large chemical plant is being planned with the capacity to produce 3 million pounds (lb.) of product annually. Raw-materials costs for the product are $0.45/lb., labor costs are $0.40/lb., and utility costs are $0.25/lb. Overhead costs are 75 percent of the labor costs.
a. If the company desires a profit equal to 20 percent of the total product cost, estimate the selling price per pound of product.
b. A similar plant with a capacity of 1.8 million lb. of product was constructed 8 years ago at a cost of $6 million when the cost index was 124. The current cost index is 261 and the cost-capacity factor for this type of plant is 0.84. Estimate the cost of constructing the 3 million pound-per-year chemical plant.
c. Annual sales for the new plant are 3.2 million lb. per year for the first 10 years and 2.5 million lb. per year for the following 5 years. (The production can be accommodated within the stated capacity of the new plant.) Based on the estimates obtained in parts (a) and (b), will the plant be profitable. Assume investment cost must be recovered from the 20 percent profit calculated in part (a). Use a MARR = 6 percent and the present worth method to justify your decision.
