Due to the limited availability of recycling materials, the plant manager is considering making a pitch to the President regarding an addition to the current line of products from the Charlotte plant. He suggests that one of the three products, paper, cups or packaging be produced from new materials and not recycled materials. The recycled material released from using new material for the manufacturing of the one product could be used for the other two products, thus relaxing the constraint caused by limited recycling material. He held several meetings with heads from affected departments and has derived the following schedule. The Company's cost of capital is 6%.

The manager believes that after six years recycling material will be abundant due to the green consciousness of society. The initial Investment to convert some of the machines is $30,000 for paper, $28,000 for cups and $26,000 for packaging. Ignore any salvage values.
He has asked that, using the above data, you prepare a schedule of which product, if converted, should be chosen. Use the traditional methods of
(1) Payback period,
(2) Accounting rate of return where cash flow equals profit. and the initial investment is the average investment.
(3) Net present value and
(4) Internal rate of return. 

Write a short memo discussing which alternative you choose and why. Your answer should be organized and wellwritten.

Transcribed Image Text:

1 5,500 2 6,500 35,500 4 5 8,200 6 8,300 Year Envelop Cups 9,000 6,500 6,300 4,500 4,300 3.800 Packaging 6,200 6,200 6,200 6,200 6,200 6,200 3,800