Jonathan Butler, process engineer, knows that the acceptance of a new process design will depend on its economic feasibility. The new process is designed to improve environmental performance. On the negative side, the process design requires new equipment and an infusion of working capital. The equipment will cost $1,200,000, and its cash operating expenses will total $270,000 per year. The equipment will last for 7 years but will need a major overhaul costing $120,000 at the end of the fifth year. At the end of 7 years, the equipment will be sold for $96,000. An increase in working capital totaling $120,000 will also be needed at the beginning. This will be recovered at the end of the 7 years.

On the positive side, Jonathan estimates that the new process will save $400,000 per year in environmental costs (fines and cleanup costs avoided). The cost of capital is 12%.

Required:

1.

Prepare a schedule of cash flows for the proposed project. (Assume that there are no income taxes.)

2.

Compute the NPV of the project. Should the new process design be accepted?

Refer to the list below for the exact wording of an amount description within your schedule.

Amount Descriptions
Equipment
Equipment operating costs
Cost savings
Overhaul
Recovery of working capital
Salvage value
Total
Working capital

1. Prepare a schedule of cash flows for the proposed project. (Assume that there are no income taxes.) Refer to the list of Amount Descriptions for the exact wording of text items within your schedule. If an amount is negative or an outflow, first enter a minus sign (-).

Question not attempted.

Score: 0/100

Schedule of Cash Flows

1	Year 0
2
3
4
5	Years 1-7
6
7
8
9	Year 5
10
11	Year 7
12
13
14