Analyze whether Healy Pharmaceuticals should invest in a new incineration facility at Compton. You are to assume that Healy has already consolidated all incineration operations at Compton and decommissioned all other site incinerations facilities.

Detailed information regarding this investment opportunity is on the next page. This information and analysis is independent of any previous problem.

Healy Pharmaceuticals has recently consolidated its hazardous waste incineration operations at its Compton plant site. The company eliminated the incineration facilities at two other sites and now transports the liquid waste from these facilities to Compton. The current Compton incineration facility operates 24 hours a day, seven days a week, except for scheduled shutdowns for maintenance. Environmental regulations require that hazardous waste not be stored in a single location for longer than 90 days.

Healys current estimates for annual hazardous liquid waste generation levels from all production facilities are 7,389 tons of primary (mostly chemicals) waste and 18,945 tons of secondary (mostly water) waste. The Compton facility currently has a staff of one department head and one technician, and operates with four 12-hour shift crews. Each crew has a shift supervisor and six incinerator operators.

Healy engineers have identified a new incinerator technology that they believe would benefit the company in terms of operating efficiency (waste destruction would occur at the same level of quality and completeness as with the existing equipment). Details regarding the new equipment and Healys costs include:

Practical capacity of 8,000 tons primary and 20,000 tons secondary waste per year at an operating rate of 14 tons per hour over one eight-hour shift five days per week (assuming 50 weeks of operation and two weeks of planned maintenance each year)

Eight operators per shift to maintain steady state

Useful life of 20 years

Healy estimates average annual costs (including wages, benefits, and personnel administration costs) for various job levels to be $125,000 for department heads, $100,000 for shift supervisors, $90,000 for technicians, and $80,000 for production operators

Weighted average variable operating costs (not including labor) of $40 per ton at steady state. Current operations have weighted average variable operating cost of $51 per ton

Daily start-up costs of $2,000.

Permitting and initial regulatory expenses (during construction) of $1.25 million

Purchase price of $3 million

Transportation costs of $450 thousand

Facility retrofit and installation costs of $250 thousand

Operator training costs of $300,000

Technology changes would require a second technician, but the reduced staff would enable incineration operations to report to the department head of solvent recovery

An increase of working capital of $35,000 for spare parts

Decommissioning costs in the final year of $750 thousand, net of any scrap or salvage value

Pharmaceutical companies reported an average return on equity of 29% over the past five years. Healys average interest payments on its long-term debt are at a rate of 9% and its tax rate is 35%. Its stock has a beta of 3.15 and current T-bill rates are 2% for one-year notes and 6% for 10-year notes. The company will pay for the new treatment system with available cash. Healys debt-to-equity ratio is 0.55.

The total annual after-tax cash outflow (facility, personnel, and variable costs of incineration and transportation = $9,339,208

B. Consolidate all incineration operations at Compton
Site	Incremental Burning Costs	Transportation to Site	Personnel Costs	Facility Costs	Total Pre-TaxCosts	Total After-Tax Costs	Total After-Tax Cash Flows (Removing Depreciation)
Tobin	$0	$0	$640,000	$400,000	$1,040,000	$728,000.00	$528,000.00
Compton (including all waste)	$1,338,340	$938,840	$3,815,000	$9,000,000	$15,092,180	$10,564,526.00	$5,564,526.00
Milla	$0	$0	$320,000	$150,000	$470,000	$329,000.00	$279,000.00
Total	$1,338,340	$938,840	$4,775,000	$9,550,000	$16,602,180	$11,621,526	$6,371,526
Personnel Costs and Quantities
	Annual Salary	T Open	T Closed	C Open	C Closed	M Open	M Closed
Department Head	$125,000	1	0	1	0	1	0
Supervisor	$100,000	4	0	4	0	4	0
Technician	$90,000	1	0	1	0	1	0
Operator	$80,000	20	8	40	16	12	4
Waste Volumes		Primary	Secondary		Cost to burn ($/ton)	Primary	Secondary
	Tobin	1183	1705		Tobin	$104	$104
	Compton	4000	18000		Compton	$25	$57
	Ilium	1576	0		Milla	$235	$435
	Milla	630	490		Extern	$100	$100
	Cordo	100	0
Facility Expenses		Operating Expenses	Depreciation	Tax Shield	Net cash flow
	Tobin	$2,000,000	$2,000,000	$600,000	$1,400,000
	Compton	$4,000,000	$5,000,000	$1,500,000	$2,500,000
	Milla	$1,000,000	$500,000	$150,000	$850,000
Trasnportation Costs (per Ton)
	60
	65
	83
	550	From Puerto Rico to mainland