Required:

1. What is the total cost, in present value terms, of the Solvent-Paint System?

2. What is the total cost, in present value terms, of the Powder-Paint System?

3. What is the most the firm should be willing to pay for the powder-based process?

Myers Manufacturing Inc. wants to build a booth for painting the boxes it makes for small transformers used to power neon signs. The company can choose either a solvent-based or a powder-based paint process. The following table summarizes the costs and investment required by each approach: Initial investment Unit paint cost Estimated life in years Annual units Solvent-Paint Process $ 400,000 $ 0.21 10 2,000,000 Powder-Paint Process $ 1,200,000 0.20 10 2,000,000 tA The firm will incur additional environmental costs with the solvent paint process but not with the powder paint process. The firm estimates annual environmental costs for the solvent paint process as follows: Monthly pit cleaning Hazardous waste disposal Superfund fee Worker training Insurance Amortization of air-emission permit Air-emission fee Recordkeeping Wastewater treatment Units 12 183 18,690 2 1 0.2 44.6 0.25 1 Unit Cost $ 1,000 3,000 0.17 1,500 10,000 1,000 25 45,000 50,000 The firm estimates its after-tax cost of capital to be 12%. Either system is a 10-year property under MACRS (see text Exhibit 12.4). The firm pays a total of 40% in income taxes. EXHIBIT 12.4 MACRS Depreciation Rates Year 3-year 5-year 7-year 10-year 15-year 20-year 33.33 20.00 14.29 10.00 5.00 3.75 1 2 44.45 32.00 24.49 18.00 9.50 7.22 3 14.81 19.20 17.49 14.40 8.55 6.68 4 7.41 11.52* 12.49 11.52 7.70 6.18 5 11.52 8.93* 9.22 6.93 5.71 6 5.76 8.92 7.37 6.23 5.28 7 8.92 6.55* 5.90* 4.89 8 4.47 6.55 5.90 4.52 9 6.56 5.91 4.46* 10 6.55 5.90 4.46 11 3.28 etc. etc