Competing P2 Investments

Ron Vargas, the CEO for Sunders 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 Ron 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.

Ron'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 Sunders'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:

	Scrubbers and Treatment	Process Redesign
Initial outlay	$50,000,000	$100,000,000
Incremental revenues	10,000,000	30,000,000
Incremental cash expenses	24,000,000	10,000,000

The expected life for each investment's equipment is six years. The expected salvage value is $2,000,000 for scrubbers and treatment equipment and $3,000,000 for process redesign equipment. The combined federal and state tax rate is 25 percent. The cost of capital is 10 percent.

You must use the Exhibit 19B.1 and Exhibit 19B.2 present value tables and Exhibit 19.5 to solve the following problems.

1. Compute the NPV of each proposal. If the NPV is negative, enter your answer as a negative value. Enter your answers in thousands.

	NPV
Scrubbers and treatment facility	$fill in the blank 1
Process redesign	$fill in the blank 2