Problem 19.24 (Algorithmic) Pollution Prevention, P2 Investment

Heaps Company produces jewelry that requires electroplating with gold, silver, and other valuable metals. Electroplating uses large amounts of water and chemicals, producing wastewater with a number of toxic residuals. Currently, Heaps uses settlement tanks to remove waste; unfortunately, the approach is inefficient, and much of the toxic residue is left in the water that is discharged into a local river. The amount of toxic discharge exceeds the legal, allowable amounts, and the company is faced with substantial, ongoing environmental fines. The environmental violations are also drawing unfavorable public reaction, and sales are being affected. A lawsuit is also impending, which could prove to be quite costly.

Management is now considering the installation of a zero-discharge, closed-loop system to treat the wastewater. The proposed closed-loop system would not only purify the wastewater, but also produce cleaner water than that currently being used, increasing plating quality. The closed-loop system would produce only four pounds of sludge, and the sludge would be virtually pure metal, with significant market value. The system requires an investment of $625,100 and will cost $44,000 in increased annual operation plus an annual purchase of $7,650 of filtration medium. However, management projects the following savings:

Water usage	$	67,090
Chemical usage		42,050
Sludge disposal		90,190
Recovered metal sales		44,850
Sampling of discharge		120,780
Total	$	364,960

The equipment qualifies as a seven-year MACRS asset. Management has decided to use straight-line depreciation for tax purposes, using the required half-year convention. The tax rate is 40 percent. The projected life of the system is 10 years. The hurdle rate is 16 percent for all capital budgeting projects, although the companys cost of capital is 12 percent.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

EXHIBIT 19B.1 Present Value of $1 Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.714 0.961 0.925 0.890 0.857 0.826 0.797 0.769 0.743 0.718 0.694. 0.672 0.650 0.630 0.610 0.592 0.574. 0.510 0.942 0.889 0,840 0.794 0.751 0.712 0.675 0.641 0,609 0.579 0,551 0.524. 0.500 0,477 0.455 0.435 0.364 0.924 0.855 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482 0.451 0.423 0.397 0.373 0.350 0.329 0.260 0.906 0.822 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402 0.370 0.341 0.315 0.291 0.269 0.250 0.186 0.888 0.790 0,705 0.636 0.564 0.507 0.456 0.410 0.370 0.335 0.303 0.275 0.250 0.227 0.207 0.189 0.133 0.871 0.760 0.665 0.583 0.513 0.452 0.400 0.354 0.314 0.279 0.249 0.222 0.198 0.178 0.159 0.143 0.095 0.853 0.731 0.627 0.540 0.467 0.404. 0.351 0.305 0.266 0.233 0.204 0.179 0.157 0.139 0.123 0.108 0.068 0.837 0.703 0,592 0.500 0,424 0.361 0.308 0.263 0.225 0.194. 0.167 0.144 0.125 0.108 0.094 0.082 0.048 0.820 0.676 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 0.137 0.116 0.099 0.085 0.073 0.062 0.035 11 0.804 0.650 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.112 0.094 0.079 0.066 0.056 0.046 0.025 0.788 0.625 0.497 0.397 0.319 0.257 0,208 0.168 0.137 0.112 0.092 0.076 0.062 0.052 0.043 0.036 0.018 13 0.773 0.601 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093 0.075 0.061 0.050 0.040 0.033 0.027 0.013 14 0.758 0.577 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078 0.062 0.049 0.039 0.032 0.025 0.021 0.009 15 0.743 0.555 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 0.051 0.040 0.031 0.025 0.020 0.016 0.006 0.728 0.534 0.394 0.292 0.218 0.163 0.123 0.093 0.071 0.054 0.042 0.032 0.025 0.019 0.015 0.012 0.005 0.714 0.513 0.371 0.270 0.198 0.146 0.108 0.080 0.060 0.045 0.034 0.026 0.020 0.015 0.012 0.009 0.003 18 0.700 0.494. 0.350 0.250 0.180 0.130 0.095 0.069 0.051 0.038 0.028 0.021 0,016 0.012 0.009 0.007 0.002 0.686 0.475 0.331 0.232 0.164 0.116 0.083 0.060 0.043 0.031 0.023 0.017 0.012 0.009 0.007 0.005 0.002 19 0.673 0.456 0.312 0.215 0.149 0.104 0.073 0.051 0.037 0.026 0.019 0.014. 0.010 0.007 0.005 0.004. 0.001 21 0.660 0.439 0.294 0.199 0.135 0.093 0.064 0.044 0.031 0.022 0.015 0.011 0.008 0.006 0.004 0.003 0.001 0.647 0.422 0.278 0.184 0.123 0.083 0.056 0.038 0.026 0.018 0.013 0.009 0.006 0.004. 0.003 0.002 0.001 0.634 0.406 0.262 0.170 0.112 0.074 0.049 0.033 0.022 0.015 0.010 0.007 0.005 0.003 0.002 0.002 0.000 0.622 0.390 0.247 0.158 0.102 0.066 0.043 0.028 0,019 0.013 0.008 0.006 0.004 0.003 0.002 0.001 0.000 0.610 0.375 0.233 0.146 0.092 0.059 0.038 0.024 0.016 0.010 0,007 0.005 0.003 0.002 0.001 0.001 0.000 26 0.598 0.361 0.220 0.135 0.084 0.053 0.033 0.021 0.014 0.009 0.006 0.004 0.002 0.002 0.001 0.001 0.000 27 0.586 0.347 0.207 0.125 0.076 0.047 0,029 0.018 0,011 0,007 0,005 0.003 0,002 0.001 0,001 0,001 0,000 0.574 0.333 0.196 0.116 0.069 0.042 0.026 0.016 0.010 0.006 0.004 0.002 0.002 0.001 0.001 0.000 0.000 28 29 0.563 0.321 0.185 0.107 0.063 0.037 0.022 0.014. 0.008 0.005 0.003 0.002 0.001 0.001 0.000 0.000 0.000 0.552 0.308 0,174 0.099 0.057 0.033 0.020 0.012 0.007 0,004 0.003 0.002 0.001 0,001 0,000 0,000 0,000