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Problem 19.24 (Algorithmic)
Pollution Prevention, P2 Investment
Heaps Company produces jewelry that 1 answer below » Problem 19.24 (Algorithmic) Pollution Prevention, P2 Investment Heaps Company produces jewelry that requires electroplating with
gold, silver, and other valuable metals. Electroplating uses large
amounts of water and chemicals, producing wastewater with a number
of toxic residuals. Currently, Heaps uses settlement tanks to
remove waste; unfortunately, the approach is inefficient, and much
of the toxic residue is left in the water that is discharged into a
local river. The amount of toxic discharge exceeds the legal,
allowable amounts, and the company is faced with substantial,
ongoing View complete question » Problem 19.24 (Algorithmic) Pollution Prevention, P2 Investment Heaps Company produces jewelry that requires electroplating with
gold, silver, and other valuable metals. Electroplating uses large
amounts of water and chemicals, producing wastewater with a number
of toxic residuals. Currently, Heaps uses settlement tanks to
remove waste; unfortunately, the approach is inefficient, and much
of the toxic residue is left in the water that is discharged into a
local river. The amount of toxic discharge exceeds the legal,
allowable amounts, and the company is faced with substantial,
ongoing environmental fines. The environmental violations are also
drawing unfavorable public reaction, and sales are being affected.
A lawsuit is also impending, which could prove to be quite
costly. Management is now considering the installation
of a zero-discharge, closed-loop system to treat the wastewater.
The proposed closed-loop system would not only purify the
wastewater, but also produce cleaner water than that currently
being used, increasing plating quality. The closed-loop system
would produce only four pounds of sludge, and the sludge would be
virtually pure metal, with significant market value. The system
requires an investment of $630,000 and will cost $44,960 in
increased annual operation plus an annual purchase of $7,460 of
filtration medium. However, management projects the following
savings: Water usage $ 67,880 Chemical usage 42,330 Sludge disposal 89,790 Recovered metal sales 44,790 Sampling of discharge 119,750 Total $ 364,540 The equipment qualifies as a seven-year MACRS asset. Management
has decided to use straight-line depreciation for tax purposes,
using the required half-year convention. The tax rate is 40
percent. The projected life of the system is 10 years. The hurdle
rate is 16 percent for all capital budgeting projects, although the
companyA???s cost of capital is 12 percent. The present value tables provided in Exhibit 19B.1 and Exhibit
19B.2 must be used to solve the following problems. Required: 1. Based on the financial data provided,
prepare a schedule of expected cash flows. Enter cash outflows as
negative amounts and cash inflows as positive amounts. Heaps Company Schedule of Expected Cash Flow Year 0 $ ____ Year 1: ______ Operating costs $ _____ Savings ______ Depreciation shield _____ Total $ _____ Years 2A???7: Operating costs $ _____ Savings _____ Depreciation shield _____ Total $ _____ Year 8: Operating costs $ _____ Savings _____ Depreciation shield _____ Total $ _____ Years 9A???10: Operating costs $ _____ Savings _____ Total $ _____ 2. What is the payback period? Round your
answer to two decimal places. _____ years 3. Calculate the NPV of the closed-loop system.
Round intermediate calculations and the final answer to the nearest
dollar. $ _____ Suppose, for example, that the annual fines being incurred are
$75,480, the sales effect is $60,440 per year, the quality effect
is not estimable, and cancellation of the lawsuit because of the
new system would avoid an expected settlement at the end of Year 3
(including legal fees) of $302,500. Assuming these are all
after-tax amounts, what effect would their inclusion have on the
payback period? On the NPV? Round payback to two decim…
