Dayton Industrial produces a variety of chemicals that are used in an array of commercial applications. One popular product, a chemical solvent, contains two very caustic acids, A and B, each of which can present a very serious environmental hazard if not disposed of properly. For every ton of chemical produced, 500 pounds of Acid A and 300 pounds of Acid B are required. Inefficiencies in the current production process allow 40 pounds of Acid A and 20 pounds of Acid B to remain as waste from each ton of chemical manufactured. Because of impurities the waste acids cannot be used in the production of future batches of product. The company incurs a cost of $2 per pound to dispose of the waste acid produced.
Recently, the company has become aware of new technology that reduces the amount of waste acids produced. This technology would generate only 1 pound of Acid A and 5 pounds of Acid B as waste from each ton of chemical manufactured. Corporate management has estimated that the new technology could be acquired and installed at a cost of $1,300,000. The technology would have a life expectancy of nine years. The new technology would not otherwise affect the cost of producing the chemical solvent.
a. Which environmental cost management strategy is Dayton Industrial considering in this example?
b. Why would the application of discounted cash flow methods be appropriate for evaluating the new technology?