David Chasteen, the CEO for SOA Manufacturing, was wondering which of two pollution control systems he should choose. Their current production process produced a gaseous and a liquid residue. A recent state law mandated that emissions of these residues be reduced to levels considerably below current performance. Failure to reduce the emissions would in¬

voke stiff fines and possible closure of the operating plant. Fortunately, the new law pro¬

vided a transition period, and David had used the time wisely. His engineers had devel¬

oped two separate proposals. The first proposal involved the acquisition of scrubbers for gaseous emissions and a treatment facility to remove the liquid residues. The second pro¬
posal was more radical. It entailed the redesign of the manufacturing process and the ac¬
quisition of new production equipment to support this new design. The new process would solve the environmental problem by avoiding the production of residues.
Although the equipment for each proposal normally would qualify as seven-year prop¬
erty, the state managed to obtain an agreement with the federal government to allow any pollution abatement equipment to qualify as five-year property. State tax law follows fed¬
eral guidelines. Both proposals qualify for the five-year property benefit.
David's Marketing vice president has projected an increase in revenues because of fa¬
vorable environmental performance publicity. This increase is the result of selling more of SOA's products to environmentally conscious customers. However, because the second ap¬
proach is "greener," the vice president believes that the revenue increase will be greater.
Cost and other data relating to the two proposals are given below:

The expected life for each investment's equipment is 6 years. The expected salvage value is $1,000,000 for scrubbers and treatment "equipment and $1,500,000 for process redesign equipment. The combined federal and state tax rate is 40%. The cost of capital is 10%.
Required:
1. Compute the NPV of each proposal and make a recommendation to David Chasteen.
2. The environmental manager observes that the scrubbers and treatment facility enable the company to just meet state emission standards. She feels that the standards will likely increase within 3 years. If so, this would entail a modification at the end of 3 years costing an additional $4,000,000. Also, she is concerned that continued liquid residue releases—even those meeting state standards—could push a local lake into a hazardous state by the end of 3 years. If so, this could prompt political action requiring the com¬
pany to clean up the lake. Clean-up costs would range between $20,000,000 and $30,000,000. Analyze and discuss the effect this new information has on the two alter¬
natives. If you have read the chapter on environmental cost management, describe how the concept of ecoefficiency applies to this setting.

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Initial outlay Incremental revenues Incremental cash expenses Scrubbers and Treatment $25,000,000 5,000,000 12,000,000 Process Redesign $50,000,000 15,000,000 5,000,000