Essay Ajax Petroleum

781 Words Apr 6th, 2014 4 Pages
To: Bill MacGregor
From:
Cost Accounting
3/24/2014

Executive Summary
This report looks at Ajax Petroleum’s financial situation regarding their look into the addition of a new piece of equipment. This equipment would allow them to turn their crude oil into feedstock for their catalytic cracker which would turn this crude oil into gasoline. This gasoline would sell for far more than the crude oil itself however, the new equipment would be costly and would not turn profit until nine years after the purchase of the equipment. This study focuses on the decision at hand for Ajax Petroleum.
I. INTRODUCTION

Ajax Petroleum Company is an oil refinery in Middletown, Ohio. The company is currently being managed by Bill MacGregor, who
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A desirable profitability index is any number greater than 1 which would indicate a higher present value of future cash flows than the initial investment. Ajax Petroleum Company | Cash Flow Analysis for the SDU Project | | | | | | | | | | | Value of Cracking Stock Produced | $ 37.50 | | | | Less: Fuel Cost | (2.90) | | | | Feedstock Cost | (32.30) | | | | Contribution per barrel | $ 2.30 | | | | | | | | | Contribution Margin per year | $ 7,555,500 | | | | Less: Operating Cost per year | (3,300,000) | | | | Operating Cash Flow per year | $ 4,255,500 | | | | After tax (46%) Cash Flow | 2,297,970 | | | | Tax benefit of depreciation | 690,000 | | | | Total Cash Flow per year (after tax) | $ 2,987,970 | | | | PV of annual cash flows (20 yr @ 20%) | 14,550,158 | | | | Net Present Value (20 yr @ 20%) | ($12,449,842) | | | | | | | | | Payback (in years) | 9.04 | | | | | | | | | Internal Rate of Return | 9% | | | | | | | | | Profitability Index | 0.54 | | | | | | | | | Return on Capital Employed | 22.13% | | | | | | | | | Assumptions: | | | | | Fuel Cost | 10% Crude Cost

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