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: Unit paint cost Initial investment Estimated life in years. Annual units Solvent-Paint Process $ 600,000 $ 0.16 10 2,000,000 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: Monthly pit cleaning Hazardous waste disposal Superfund fee Worker training Insurance Amortization of air-emission permit Air-emission fee Recordkeeping Wastewater treatment Unit Units Cost 12 $ 1,000 183 3,000 18,690 0.17 2 1,500 1 10,000 0.2 1,000 44.6 25 0.25 1 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.) 1. Total cost (Solvent-Paint System) 2. Total cost (Powder-Paint System) 3. Maximum amount to be paid
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: Unit paint cost Initial investment Estimated life in years. Annual units Solvent-Paint Process $ 600,000 $ 0.16 10 2,000,000 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: Monthly pit cleaning Hazardous waste disposal Superfund fee Worker training Insurance Amortization of air-emission permit Air-emission fee Recordkeeping Wastewater treatment Unit Units Cost 12 $ 1,000 183 3,000 18,690 0.17 2 1,500 1 10,000 0.2 1,000 44.6 25 0.25 1 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.) 1. Total cost (Solvent-Paint System) 2. Total cost (Powder-Paint System) 3. Maximum amount to be paid
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Munabhai
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
Solvent-Paint
Process
$ 600,000
$ 0.16
10
2,000,000
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:
Units
Unit
Cost
Monthly pit cleaning
12
$ 1,000
Hazardous waste disposal
183
3,000
Superfund fee
18,690
0.17
Worker training
2
1,500
Insurance
1
10,000
Amortization of air-emission permit
Air-emission fee
0.2
1,000
44.6
25
Recordkeeping
0.25
Wastewater treatment
1
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.)
1.
Total cost (Solvent-Paint System)
2.
Total cost (Powder-Paint System)
3.
Maximum amount to be paid
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