CASE SCENARIO James Jones, the CEO for Clean Manufacturing, was wondering which of two pollution control systems he should choose. The firm's current production process produces a gaseous and a liquid residue. A recent state law mandated that emissions of these residues be reduced to levels considerably below current performance. Failure to reduce the emissions would invoke stiff fines and possible closure of the operating plant. Fortunately, the new law provided a transition period, and James had used the time wisely. His engineers had developed two separate proposals. The first proposal involved the acquisition of scrubbers for gaseous emissions and a treatment facility to remove the liquid residues. The second proposal was more radical. It entailed the redesign of the manufacturing process and the acquisition of new production equipment to support this new design. The new process would solve the environmental problem by avoiding the production of residues. Although the equipment for each proposal normally would qualify as seven-year property, the state managed to obtain an agreement with the federal government to allow any pollution abatement equipment to qualify as five-year property. State tax law follows federal guidelines. Both proposals qualify for the five-year property benefit. James's vice president of marketing has projected an increase in revenues because of favorable environmental performance publicity. This increase is the result of selling more of Clean's products to environmentally conscious customers. However, because the second approach is greener, the vice president believes that the revenue increase will be greater. Cost and other data relating to the two proposals are as follows: Initial Outlay Incremental Revenue Incremental Cash Expense Scrubbers & Treatment $ 18,500,000 $ 12,000,000 $ 22,000,000 Process Redesign $ 78,500,000 $ 20,000,000 $15,000,000 The expected life for each investment's equipment is six years. The expected salvage value is $5,000,000 for scrubbers and treatment equipment and $3,500,000 for process redesign equipment. The combined federal and state tax rate is 29 percent. The cost of capital is 10 percent. INFORMATION (input info in thousands i.e. $1,000,000 enter as $1,000) Expected life for each investment's equipment Proposal Cost Data Scrubbers & Treatment Initial Outlay $ 18,500 $ Incremental Revenue $ 12,000 $ Incremental Cash Expense 22,000 $ 6 years Process Redesign 78,500 20,000 15,000 Expected salvage value scrubbers and treatment equipment process redesign equipment Combined federal and state tax rate Cost of capital $ $ 5,000 3,500 29% 10% MACRS Depreciation Rates Year 3 yr assets 1 33.33% 2 44.45% 3 14.81% 4 7.41% 5 6 7 8 5 yr assets 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7 yr assets 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Enter the appropriate amounts in the gray shaded cells, formulas only. Enter negative values where appropriate. Luse the Present Value tables in your textbook to enter the discount factor in column L. The dropdown answer will be graded by your instructor. Scrubbers and treatment facility (expressed in thousands) Present Value (1 t)R -(1 - 1)CE INC CF df Year 0 1 2 3 4 5 6 NPV Process redesign (expressed in thousands) Present Value (1 -t)R -(1-t)CE INC CF df Year 0 1 2 3 4 5 6 NPV The is less costly and should be implemented. CASE SCENARIO James Jones, the CEO for Clean Manufacturing, was wondering which of two pollution control systems he should choose. The firm's current production process produces a gaseous and a liquid residue. A recent state law mandated that emissions of these residues be reduced to levels considerably below current performance. Failure to reduce the emissions would invoke stiff fines and possible closure of the operating plant. Fortunately, the new law provided a transition period, and James had used the time wisely. His engineers had developed two separate proposals. The first proposal involved the acquisition of scrubbers for gaseous emissions and a treatment facility to remove the liquid residues. The second proposal was more radical. It entailed the redesign of the manufacturing process and the acquisition of new production equipment to support this new design. The new process would solve the environmental problem by avoiding the production of residues. Although the equipment for each proposal normally would qualify as seven-year property, the state managed to obtain an agreement with the federal government to allow any pollution abatement equipment to qualify as five-year property. State tax law follows federal guidelines. Both proposals qualify for the five-year property benefit. James's vice president of marketing has projected an increase in revenues because of favorable environmental performance publicity. This increase is the result of selling more of Clean's products to environmentally conscious customers. However, because the second approach is greener, the vice president believes that the revenue increase will be greater. Cost and other data relating to the two proposals are as follows: Initial Outlay Incremental Revenue Incremental Cash Expense Scrubbers & Treatment $ 18,500,000 $ 12,000,000 $ 22,000,000 Process Redesign $ 78,500,000 $ 20,000,000 $15,000,000 The expected life for each investment's equipment is six years. The expected salvage value is $5,000,000 for scrubbers and treatment equipment and $3,500,000 for process redesign equipment. The combined federal and state tax rate is 29 percent. The cost of capital is 10 percent. INFORMATION (input info in thousands i.e. $1,000,000 enter as $1,000) Expected life for each investment's equipment Proposal Cost Data Scrubbers & Treatment Initial Outlay $ 18,500 $ Incremental Revenue $ 12,000 $ Incremental Cash Expense 22,000 $ 6 years Process Redesign 78,500 20,000 15,000 Expected salvage value scrubbers and treatment equipment process redesign equipment Combined federal and state tax rate Cost of capital $ $ 5,000 3,500 29% 10% MACRS Depreciation Rates Year 3 yr assets 1 33.33% 2 44.45% 3 14.81% 4 7.41% 5 6 7 8 5 yr assets 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7 yr assets 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Enter the appropriate amounts in the gray shaded cells, formulas only. Enter negative values where appropriate. Luse the Present Value tables in your textbook to enter the discount factor in column L. The dropdown answer will be graded by your instructor. Scrubbers and treatment facility (expressed in thousands) Present Value (1 t)R -(1 - 1)CE INC CF df Year 0 1 2 3 4 5 6 NPV Process redesign (expressed in thousands) Present Value (1 -t)R -(1-t)CE INC CF df Year 0 1 2 3 4 5 6 NPV The is less costly and should be implemented