Paper reclaim capital investment analysis

The Victor Paper Company manufactures paper products from pulp. The process creates paper scrap from paper trim, off-grade, and machine errors. Presently, the scrap paper is discarded in a landfill. Management is considering a proposal for a scrap paper reclamation system. The system is designed so that paper is discarded in vacuum collection points located throughout the plant. The vacuum system would be attached to a reclaim process that would digest the scrap paper, turning it back into pulp, and then blending the reclaimed product back into the papermaking process with virgin (new) pulp. The blended stream is termed blended pulp. It has been determined that the quality of the final product is not adversely impacted by using blended pulp versus using 100% virgin pulp. In addition, the cost of the reclaimed pulp is considered free to the blended stream, and causes the amount of virgin pulp used in the blended stream to be less than would be otherwise. These factors reduce the cost of the blended stream. Some information involving this proposal is as follows:

Reclaim system investment cost		$40,000,000
Annual operating cost of reclaim system		$500,000
Cost of virgin pulp		$600 per ton
Cost of blended pulp		$560 per ton
Finished processing volume		1,200 tons per day
Operating days per year		360

a. Determine the annual cost savings from using blended pulp. $fill in the blank 1

b. Prepare a capital investment analysis using net present value to determine if the reclamation system is justified. Assume a 10-year life and 8% minimum rate of return. (Use the present value tables in Appendix A.) Round present value calculations to the nearest dollar.

Amount to be invested		$fill in the blank 2
Present value of annual net cash flows		$fill in the blank 3
Net present value		$fill in the blank 4

Based on the net present value, the proposal should be accepted.