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 $623,700 and will cost $44,180 in increased annual operation plus an annual purchase of $7,070 of filtration medium. However, management projects the following savings: Water usage $ 67,760 Chemical usage 42,070 Sludge disposal 90,320 Recovered metal sales 45,170 Sampling of discharge 120,220 Total $ 365,540 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 company’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: 4. The calculation in Requirement 3 ignored several factors that could affect the project’s viability: savings from avoiding the annual fines, positive effect on sales due to favorable environmental publicity, increased plating quality from the new system, and the avoidance of the lawsuit. Can these factors be quantified? Suppose, for example, that the annual fines being incurred are $74,710, the sales effect is $59,710 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 $308,600. Assuming these are all after-tax amounts, what effect would their inclusion have on the payback period? On the NPV? Round payback to two decimal places and round NPV calculation and final answer to the nearest dollar. Payback Decreases by fill in the blank years NPV Increases by $fill in the blank
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 $623,700 and will cost $44,180 in increased annual operation plus an annual purchase of $7,070 of filtration medium. However, management projects the following savings: Water usage $ 67,760 Chemical usage 42,070 Sludge disposal 90,320 Recovered metal sales 45,170 Sampling of discharge 120,220 Total $ 365,540 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 company’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: 4. The calculation in Requirement 3 ignored several factors that could affect the project’s viability: savings from avoiding the annual fines, positive effect on sales due to favorable environmental publicity, increased plating quality from the new system, and the avoidance of the lawsuit. Can these factors be quantified? Suppose, for example, that the annual fines being incurred are $74,710, the sales effect is $59,710 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 $308,600. Assuming these are all after-tax amounts, what effect would their inclusion have on the payback period? On the NPV? Round payback to two decimal places and round NPV calculation and final answer to the nearest dollar. Payback Decreases by fill in the blank years NPV Increases by $fill in the blank
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
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 $623,700 and will cost $44,180 in increased annual operation plus an annual purchase of $7,070 of filtration medium. However, management projects the following savings:
| Water usage | $ | 67,760 |
| Chemical usage | 42,070 | |
| Sludge disposal | 90,320 | |
| Recovered metal sales | 45,170 | |
| Sampling of discharge | 120,220 | |
| Total | $ | 365,540 |
The equipment qualifies as a seven-year MACRS asset. Management has decided to use straight-line
The
Required:
4. The calculation in Requirement 3 ignored several factors that could affect the project’s viability: savings from avoiding the annual fines, positive effect on sales due to favorable environmental publicity, increased plating quality from the new system, and the avoidance of the lawsuit. Can these factors be quantified?
Suppose, for example, that the annual fines being incurred are $74,710, the sales effect is $59,710 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 $308,600. Assuming these are all after-tax amounts, what effect would their inclusion have on the payback period? On the NPV? Round payback to two decimal places and round NPV calculation and final answer to the nearest dollar.
| Payback | Decreases | by | fill in the blank | years |
| NPV | Increases | by | $fill in the blank |
Transcribed Image Text:EXHIBIT 19B.2
Present Value of an Annuity of $1 in Arrears
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
0.962
0.980
1.942
2.884
3.808
0.943
1.833
2.673
3.465
4.212
0.926 0.909
0.893
0.877 0.862
0.847
0.833
1.528
0.820
0.806
0.794
0.781
0.769
0.758
0.714
2
1.866
1.783
1.736
1.690
1.392
1.647 1.605
2.322 2.246
2.914 2.798
3.433 3.274
3.889 3.685
4.288 4.039
1.566
1.492
1.457
1.424
1.361
1.331
1.224
1.589
1.849
2.035
3.
2.775
2577 2.487
2.402
3.037
3.605
2.174
2.106
2.042
1.981
2.404
2.745
3.020
3.242
1.923
2.320
2.635
1.868
1.816
1.766
2.096
2.345
4
3.630
3.312 3.170
2.690
2.241
2.166
2.589
2.991
2.494
2.864
5.
4.713
4.452
5.242
6.002
3.993 3.791
3.127
3.498
3.812
3.078
4.303
4.494
2.532
2.436
2.759
2.937
6.
2.643
5.601
6.472
7.325
8.162
8.983
4.917
5.582
6.210
6.802
7.360
7.887
8.384
8.853
9.295
9.712
4.623 4.355
4.111
3.326
3.167
2.885
3.083
3.241
3.366
2.534
2.168
3.605
3.837
4.031
4.192
4.327
4.439
3.416
3.619
3.786
3.923
2.677
5.206 4.868
5.747 5.335
6.247
4.564
4.968
2.802
2.925
3.019
3.092
3.147
3.190
3.223
3.249
3.268
3.283
3.295
2.263
6.733
7.435
8.111
8.760
9.385
2.331
2.379
2.414
8.
9
4.639 4.344
3.421
3.566
3.682
5.759
6.710 6.145
7.139 6.495
7.536 6.814
7.904 7.103
8.244 7.367
8.559 7.606
8.851 7.824
3.076
3.184
3.269
3.335
3.387
3.427
3.459
3.483
2.786
2.868
2.930
2.978
3.013
3.040
3.061
3.076
3.088
3.097
5.328
5.650
5.938
6.194
4.946 4.607
10
5.216 4.833
5.453 5.029
5.660 5.197
3.465
3.543
3.606
3.656
3.695
3.726
11
9.787
4.656
4.793
4.910
5.008
5.092
4.035
4.127
3.776
3.851
3.912
3.962
4.001
2.438
2.456
2.469
12
13
10.575
11.348
9.986
6.424
5.842 5.342
4.533
4.203
12.106 10.563
12.849 11.118
6.628
6.811
6.002 5.468
6.142 5.575
4.611
4.675
4.730
4.265
4.315
4.357
4.391
2.478
2.484
2.489
2.492
14
15
16
13.578 11.652 10.106
6.974
6.265 5.668
5.162
4.033
3.751
3.503
6.373 5.749
6.467 5.818
17
14.292 12.166 10.477
9.122 8.022
7.120
5.222
4.775
4.059
4.080
3.771
3.786
3.799
3.808
3.816
3.822
3.518
18
14.992 12.659 10.828
9.372 8.201
7.250
5.273
4.812
4.419
3.529
3.304
3.104
2.494
19
15.678 13.134 11.158
9.604 8.365
3.539
7.366
7.469
7.562
6.550 5.877
5.316
4.843
4.442
4.097
3.311
3.109
2.496
20
21
16.351 13.590 11.470
17.011 14.029 11.764 10.017 8.649
9.818 8.514
6.623 5.929
6.687 5.973
5.353
5.384
5.410
4.870
4.891
4.460
4.110
4.121
3.546
3.316
3.113
3.116
2.497
2.498
2.498
4.476
3.551
3.320
4.909
4.925
22
17.658 14.451 12.042 10.201 8.772
7.645
6.743 6.011
4.488
4.130
3.556
3.323
3.118
23
18.292 14.857 12.303 10.371
8.883
7.718
6.792 6.044
5.432
4.499
4.137
3.827
3.559
3.325
3.120
2.499
24
18.914 15.247 12.550 10.529 8.985
7.784
6.835 6.073
5.451
4.937
4.507
4.143
3.831
3.562
3.327
3.121
2.499
4.948
25
26
19.523 15.622 12.783 10.675 9.077
20.121
7.843
7.896
7.943
6.873 6.097
6.906 6.118
5.467
5.480
4.514
4.147
3.834
3.837
3.564
3.566
3.567
3.329
3.330
3.122
3.123
3.123
2.499
15.983 13.003 10.810 9.161
4.956
4.520
4.151
2.500
27
20.707 16.330 13.211 10.935 9.237
6.935 6.136
5.492
4.964
4.524
4.154
3.839
3.331
2.500
9.307
4.970
4.528
3.568
3.569
28
21.281 16.663 13.406 11.051
7.984
6.961 6.152
5.502
4.157
3.840
3.331
3.124
2.500
8.022
8.055
29
21.844 16.984 13.591
11.158 9.370
6.983 6.166
5.5 10
4.975
4.531
4.159
3.841
3.332
3.124
2.500
30
22.396 17.292 13.765 11.258 9.427
7.003 6.177
5.517
4.979
4.534
4.160
3.842
3.569
3.332
3.124
2.500
Transcribed Image Text:EXHIBIT 19B.1
Present Value of $1*
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
0.980
0.962
0.925
0.943
0.890
0.926
0.909
0.893
0.877
0.862
0.847
0.833
0.694
0.579
0.820
0.806
0.794
0.781
0.769
0.758
0.714
0.961
0.857
0.826
0.797
0.769
0.743
0.7 18
0.672
0.650
0.630
0.610
0.592
0.574
0.510
0.455
0.350
0.712
0.524 0.500
0.397
0.315
0.942
0.889
0.855
0.822
0.790
0.760
0.731
0.840
0.792
0.747
0.794
0.735
0.681
0.751
0.683
0.621
0.675
0.592
0.641
0.552
0.476
0.609
0.516
0.437
0.551
0.477
0.435
0.364
0.260
0.924
0.636
0.482
0.402
0.451
0.370
0.303
0.249
0.204
0.423
0.373
0.291
0.329
0.250
0.189
0.143
0.108
4.
0.906
0.567
0.519
0.341
0.269
0.186
6.
0.888
0.871
0.853
0.705
0.665
0.627
0.636
0.583
0.540
0.564
0.513
0.467
0.507
0.452
0.404
0.456
0.400
0.351
0.308
0.410
0.354
0.305
0.370
0.335
0.279
0.233
0.275 0.250
0.222 0.198
0.179 0.157
0.227
0.178
0.139
0.207
0.159
0.123
0.133
0.095
0.068
0.314
8.
0.266
0.048
0.035
9.
0.837
0.703
0.592
0.500
0.424
0.361
0.263
0.225
0.194
0.167
0.144
0.125
0.108
0.094
0.082
0.676
0.650
0.558
0.386
0.137
0.112 0.094
0.073
0.056
10
0.820
0.463
0.322
0.270
0.227
0.191
0.162
0.135
0.116
0.099
0.079
0.085
0.062
11
0.804
0.527
0.429
0.350
0.237
0.287
0.257
0.195
0.162
0.066
0.046
0.036
0.025
0.018
0.013
0.009
12
0.788
0.625
0.497
0.397
0.319
0.208
0.168
0.137
0.112
0.092
0.076
0.062
0.052
0.043
13
0.773
0.601
0.290
0.075
0.469
0.442
0.368
0.340
0.315
0.292
0.270
0250
0.229
0.205
0.183
0.182 0.145
0.116
0.093
0.061 0.050 0.040
0.039
0.031
0.033
0.025
0.020
0.027
14
0.758
0.743
0.577
0.555
0.534
0.513
0.263
0.239
0.160
0.140
0.125
0.099
0.084
0.071
0.078
0.065
0.054
0.062
0.049
0.032
0.021
0.016
15
0.417
0.108
0.051
0.040
0.025
0.006
16
17
0.728
0.394
0.371
0.350
0.218
0.163
0.146
0.130
0.123
0.108
0.093
0.080
0.069
0.042
0.034
0.028
0.032
0.025
0.026 0.020
0.021
0.019
0.015
0.015
0.012
0.009
0.012
0.009
0.007
0.005
0.003
0.714
0.198
0.060
0.045
18
0.700
0.494
0.180
0.095
0.051
0.038
0.016
0.012
0.002
19
0.686
0.475
0.331
0.232
0.164
0.116
0.083
0.060
0.043
0.031
0.023
0.017
0.012 0.009
0.007
0.005
0.002
0.149
0.135
20
0.673
0.456
0.312
0.215
0.104
0.073
0.051
0.037
0.026
0.019
0.014 0.010
0.011
0.008
0.007
0.005
0.004
0.004
0.001
21
0.660
0.439
0.294
0.278
0.199
0.093
0.064
0.044
0.031
0.022
0.015
0.006
0.003
0.001
22
0.647
0.422
0.406
0.390
0.184
0.123
0.083
0.056
0.038
0.026
0.018
0.013
0.009 0.006
0.004
0.003
0.002
0.001
23
0.634
0.262
0.170
0.112
0.074
0.049
0.033
0.022
0.015
0.010
0.007 0.005
0.003
0.002
0.002
0.000
24
0.102
0.622
0.610
0.247
0.158
0.066
0.059
0.043
0.028
0.019
0.013
0.008
0.007
0.006
0.005
0.004
0.003
0.002
0.002
0.001
0.000
0.000
0.092
0.084
0.076
0.069
0.063
25
0.375
0.233
0.038
0.001
0.146
0.135
0.024
0.016
0.010
0.003
0.001
0.009
26
27
0.598
0.586
0.574
0.361
0.347
0.220
0.207
0.053
0.047
0.033
0.029
0.021
0.018
0.016
0.014
0.011
0.006
0.007 0.005
0.004
0.003
0.004
0.003
0.002 0.002
0.002 0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.000
0.000
0.125
28
0.333
0.196
0.116
0.042
0.026
0.010
0.008
0.006
0.002 0.002
0.000
0.000
0.000
0.022
0.020
29
0.563
0.321
0.185
0.107
0.037
0.014
0.005
0.002
0.001
0.000
0.000
30
0.552
0.308
0.174
0.099
0.057
0.033
0.012
0.007
0.004
0.003
0.002
0.001
0.001
0.000
0.000
0.000
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