Example4 PayoffTables

Summary

The video analyzes the financial implications of building a new plant over a ten-year period. It explores profit margins, overhead costs, and production capacity, concluding that while initial estimates suggest potential profits with two plants, the risks may not justify the investment. The presenter uses Excel to compare scenarios of having one versus two plants, ultimately suggesting that the gains from constructing a new facility do not outweigh the costs and risks involved. Further calculations and analyses are promised in future videos to delve deeper into the financial considerations.

Takeaways

• 😀 The analysis explores the financial viability of building a new plant over a ten-year period compared to operating an existing one.
• 📊 Profit per ton is set at $39 per metric ton, influencing the overall revenue calculations.
• 💰 Overhead costs for the existing plant are fixed at $2.27 million, which will be multiplied by ten for a decade-long analysis.
• 🏭 Total production capacity with the new plant would be 4.8 million metric tons over ten years, while without it, capacity is 2.8 million metric tons.
• 📈 Demand is assumed to remain constant, with projections increasing tenfold, ranging from 100,000 to 5 million metric tons.
• 🔍 The payoff table indicates that building a new plant could result in increased profits over ten years.
• ❓ However, the analysis suggests that the potential gains from building a new plant may not justify the associated risks and costs.
• ⚖️ A comparative analysis shows that the financial outcome of not building the new plant is fairly comparable to constructing it.
• 🔄 The results emphasize the importance of evaluating both production capacity and overhead costs in investment decisions.
• 📅 Future analyses will explore other metrics like maximum expected monetary value (EMV) to further evaluate the decision.

Q & A

What is the initial profit per ton mentioned in the script?

$39 per metric ton.

What is the fixed overhead cost for the plant?

The fixed overhead cost is $2.27 million.

How long is the payout period considered in the analysis?

The payout period considered is 10 years.

What is the total capacity for production if a new plant is built?

The total capacity with the new plant is 4.8 million metric tons over 10 years.

What happens to the demand figures during the 10-year analysis?

The demand figures are multiplied by 10, leading to figures ranging from 100,000 to 5 million metric tons.

What is the cost to build the new plant?

The cost to build the new plant is $52 million.

How does the analysis conclude regarding the new plant's financial viability?

The analysis suggests that building a new plant may not be financially worthwhile, as the reward does not outweigh the risk.

What is the formula used to calculate profits in the analysis?

The profits are calculated by taking the minimum of demand and capacity, then multiplying by the profit per metric ton.

What other financial metrics are mentioned for further analysis?

The analysis mentions looking into maximum expected monetary value (EMV) and other calculations in future videos.

How does the profitability compare between having one plant versus two?

The analysis indicates that having two plants results in higher profitability compared to having just one.