4. The Seton Leather plant deposits about a million gallons a day of industrial sewage into pipes...
Question:
4. The Seton Leather plant deposits about a million gallons a day of industrial sewage into pipes controlled by the Passaic Valley Sewerage Commissioners
(PVSC). The PVSC is a large operation that treats the sewage and bills Seton and many other customers for the service. According to the latest PVSC financial reports, its daily costs are:
PVSC treats 10 million gallons of sewage a day. PVSC is required by law and bond covenants to set its price to ensure it raises enough money to cover its debt service and operating costs. It doesn’t discriminate among customers.
a. What does PVSC charge per gallon? What does Seton Leather pay per day?
A treatment equipment salesperson visits Seton Leather and explains how Seton can buy its own treatment equipment. It costs $10,000,000, and Seton can borrow at a 0.03 percent daily interest rate. The Seton plant is right next to the Passaic River, and the treatment equipment is powerful enough that if Seton installs it, its effluent will be just as clean as the PVSC effluent and so the environmental authorities will have to give them permission to dump it directly into the river. Of course, they’ll have to pay daily costs of $1,000 for electricity, $1,500 for chemicals, and $600 for removal of sludge.
b. If you were advising the CEO of Seton Leather, what would you do? How would you explain your recommendation to the stockholders?
c. Is this efficient? Why or why not?
d. If you were running the PVSC, what would you do when you heard what Seton Leather was considering? How would you balance the books? How would you explain your approach to the public, including PVSC’s other customers?
Step by Step Answer:
