Evaluation of Delayed Payment to Fix Pollution.

A chemical company can build a plant for $500 million now and retrofit it in 20 years for

$200 million to clean up pollution, or it can spend $650 million now for a plant that produces no pollution. Ignore tax consequences and non financial considerations when answering this question.

Required:

a. If the company uses a discount rate of 12% for its capital investment projects, how much should the company spend to build its plant now, i.e., $500 million or $650 million?

b. At what discount rate would managers be indifferent between the two plants?

Water Recycling Evaluation. a A plant has been purchasing water from the local utility at a price of 6.5 cents per 100 gallons. The company pays a sewage charge based on the volume of water it pours in the sewerage system at 1 cent per 100 gallons. The company uses 150 million gallons of water annually with its present manufacturing system.

LO.1