Myers Manufacturing Incorporated wants to build a booth for painting the boxes it makes for small transformers used to power neon signs. The company can choose either a solvent-based or a powder-based paint process. The following table summarizes the costs and investment required by each approach: Powder-Paint Process $ 1,200,000 $ 0.22 10 2,000,000 The firm will incur additional environmental costs with the solvent paint process but not with the powder paint process. The firm estimates annual environmental costs for the solvent paint process as follows: Initial investment Unit paint cost Estimated life in years. Annual units Monthly pit cleaning Hazardous waste disposal Superfund fee Worker training Solvent-Paint Process $ 600,000 $ 0.16 10 2,000,000 Insurance. Amortization of air-emission permit Air-emission fee Recordkeeping Wastewater treatment Units 1. Total cost (Solvent-Paint System) 2. Total cost (Powder-Paint System) 3. Maximum amount to be paid 12 183 18,690 2 1 0.2 44.6 0.25 1 Unit Cost $ 1,000 3,000 0.17 1,500 10,000 1,000 25 45,000 50,000 The firm estimates its after-tax cost of capital to be 12%. Either system is a 10-year property under MACRS (see text Exhibit 12.4). The firm pays a total of 40% in income taxes. Required: 1. What is the total cost, in present value terms, of the Solvent-Paint System? 2. What is the total cost, in present value terms, of the Powder-Paint System? 3. What is the most the firm should be willing to pay for the powder-based process? (For all requirements, Round your answer to the nearest dollar amount.)
Myers Manufacturing Incorporated wants to build a booth for painting the boxes it makes for small transformers used to power neon signs. The company can choose either a solvent-based or a powder-based paint process. The following table summarizes the costs and investment required by each approach: Powder-Paint Process $ 1,200,000 $ 0.22 10 2,000,000 The firm will incur additional environmental costs with the solvent paint process but not with the powder paint process. The firm estimates annual environmental costs for the solvent paint process as follows: Initial investment Unit paint cost Estimated life in years. Annual units Monthly pit cleaning Hazardous waste disposal Superfund fee Worker training Solvent-Paint Process $ 600,000 $ 0.16 10 2,000,000 Insurance. Amortization of air-emission permit Air-emission fee Recordkeeping Wastewater treatment Units 1. Total cost (Solvent-Paint System) 2. Total cost (Powder-Paint System) 3. Maximum amount to be paid 12 183 18,690 2 1 0.2 44.6 0.25 1 Unit Cost $ 1,000 3,000 0.17 1,500 10,000 1,000 25 45,000 50,000 The firm estimates its after-tax cost of capital to be 12%. Either system is a 10-year property under MACRS (see text Exhibit 12.4). The firm pays a total of 40% in income taxes. Required: 1. What is the total cost, in present value terms, of the Solvent-Paint System? 2. What is the total cost, in present value terms, of the Powder-Paint System? 3. What is the most the firm should be willing to pay for the powder-based process? (For all requirements, Round your answer to the nearest dollar amount.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Rahul
Transcribed Image Text:Myers Manufacturing Incorporated wants to build a booth for painting the boxes it makes for small transformers used to power neon
signs. The company can choose either a solvent-based or a powder-based paint process. The following table summarizes the costs
and investment required by each approach:
Initial investment
Unit paint cost.
Estimated life in years.
Annual units
Monthly pit cleaning
Hazardous waste disposal
Superfund fee
Worker training
Solvent-Paint
Process
$ 600,000
$ 0.16
10
2,000,000
The firm will incur additional environmental costs with the solvent paint process but not with the powder paint process. The firm
estimates annual environmental costs for the solvent paint process as follows:
Insurance.
Amortization of air-emission permit
Air-emission fee
Recordkeeping
Wastewater treatment
Powder-Paint
Process
$ 1,200,000
$ 0.22
10
2,000,000
1. Total cost (Solvent-Paint System)
2.
Total cost (Powder-Paint System)
3.
Maximum amount to be paid
Units
12
183
18,690
2
1
0.2
44.6
0.25
1
Unit
Cost
$ 1,000
3,000
0.17
1,500
10,000
1,000
25
45,000
50,000
The firm estimates its after-tax cost of capital to be 12%. Either system is a 10-year property under MACRS (see text Exhibit 12.4). The
firm pays a total of 40% in income taxes.
Required:
1. What is the total cost, in present value terms, of the Solvent-Paint System?
2. What is the total cost, in present value terms, of the Powder-Paint System?
3. What is the most the firm should be willing to pay for the powder-based process?
(For all requirements, Round your answer to the nearest dollar amount.)
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