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% of the labor costs.
(a) If the company desires a profit equal to 20% 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 eight years ago at a cost of $6 million when the cost index was 124. The current cost index value 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 estimates for the new plant are 3.2 million lb. per year for the first 10 years and 2.5 million lbs. per year for the following 5 years. Based on the estimates obtained in parts (a) and (b), will the new plant be profitable? Assume investment cost must be recovered from the 20% profit calculated in part (a). Use a MARR = 6% and the PW method to justify your decision.
[If you can't work part a, use: profit per pound = $0.30.]