Dissues the different forms of utility.

Sludgewater, a furniture manufacturer, has been reported to theanti-pollution authorities on several occasions in recent years, andfined substantial amounts for making excessive toxic discharges into theair. Both the environmental lobby and Sludgewater's shareholders havedemanded that it clean up its operations. If no clean up takes place, Sludgewater estimates that the totalfines it would incur over the next three years can be summarised by thefollowing probability distribution (all figures are expressed in presentvalues). Level of fine Probability $1.0m 0.3 $1.8m 0.5 $2.6m 0.2 A firm of environmental consultants has advised that spray paintingequipment can be installed at a cost of $4m to virtually eliminatedischarges. Unlike fines, expenditure on pollution control equipment istax-allowable via a 25% writing-down allowance (reducing balance, basedon gross expenditure). The rate of corporation tax is 30%, paid with a one-year delay. Theequipment will have no scrap or resale value after its expected threeyear working life. The equipment can be in place ready for Sludgewater'snext financial year. A European Union grant of 25% of gross expenditure is available, but with payment delayed by a year. The consultant's charge is $200,000and the new equipment will raise annual production costs by 2% of salesrevenue. Current sales are $15 million per annum, and are expected togrow by 5% per annum compound. No change in working capital isenvisaged. Sludgewater applies a discount rate of 10% after tax on investmentprojects of this nature. All cash inflows and outflows occur at yearends. Required: (a) Calculate the expected net present value of the investment. Briefly comment on your results. (12 marks) (b) Outline the main limitations of using expected values when making investment decisions. (6 marks) (c) What financial and non-financial criteria will need to be considered when deciding whether the investment should be made