Question
(12 points) A company is operating a process line that will produce 1000 barrels per year of hazardous waste in each of the next five
- (12 points) A company is operating a process line that will produce 1000 barrels per year of hazardous waste in each of the next five years (Year 1 through 5), then terminated. The waste generated must be disposed in accordance with environmental regulations at a cost of $250 per barrel in a hazardous waste landfill. If the liner between the landfill and the soil beneath were to rupture, the company would expect to pay approximately $500 per barrel of waste in 20 years. For the purpose of this question, please assume that any waste dumped in the landfill in years 1,2,3,4 and 5 will leak at the end of the twentieth year.
A proposed project would cut the hazardous waste produced by one half for the 5 years of operation, but it would incur an initial capital cost of $400,000 (in year 0) along with maintenance costs of $50,000 per year for each of years 1 to 5. Assume no depreciation or tax effects.
Reminder: The process generating hazardous waste will be discontinued after 5 years.
Question: Should the $400,000 investment be made today? Hint: Calculate the present value of the net profit (or savings) if the project was undertaken, as compared to the do Nothing option. Assume a discount rate of 5%.
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