Comparing Alternatives; Discounted Cash Flow Pottsville Process, Inc., processes an ore that yields 60 percent product A, 20 percent product B, and 20 percent complete waste. Willo, Inc., the sole customer and a mere intermediate link in the distribution chain, purchases the entire output of products A and B.

A Pottsville company engineer has developed a process that will produce a 70 percent yield of product A from the ore—a new product A that is in a form that can be sold directly to the prime user. This will eliminate Willo, Inc., as a customer for both products; there is no other available market for product B. The required investment to provide the capital equipment and the necessary expansion is $4,000,000. These new facilities have an estimated life of 20 years, exactly the remaining life of the present equipment. This money can be obtained at a rate of 4 percent. However, the company’s average cost of capital is 10 percent.

COMPARATIVE COST DATA Present Processed: 1,000,000 tons per year.

Cost data: PER TON Variable manufacturing cost $ 5.00 Fixed manufacturing cost other than depreciation 6.00 Depreciation on equipment (straight-line) .30

$11.30

“New Process”

Processed: 1,000,000 tons per year.

Cost data:

Variable manufacturing cost $10.00 Fixed manufacturing cost other than depreciation 9.00 Depreciation—including new equipment (straight-line) .50

$19.5 PRICE DATA Present:

Product A—$20.00 per ton Product B—$ 3.00 per ton

‘New Process”’:

“New Product’? A—$30.00 per ton Prepare comparative annual income statements for the two alternatives.
Analyze the alternatives on a discounted cash-flow basis, using the presentvalue technique.
Would your decision in 2 be changed if product B in the amount produced under the present process colld also be sold under the new process?