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Section 3: Capital Expenditure and Sustainability 20 marks Titanium Ltd is a leading manufacturer of steel that produces about 700,000 tonnes of steel each year

Section 3: Capital Expenditure and Sustainability 20 marks

Titanium Ltdis a leading manufacturer of steel that produces about 700,000 tonnes of steel each year for the construction, manufacturing and agricultural industries. It is a large business that employs over 5,000 people in the Pacific region.Titanium Ltdcurrently burns fossil fuels for its operations and therefore substantially contributes to the region's total greenhouse gas emissions. The waste products from its operations adversely impact the health of residents through air and water pollution. Additionally, there have been reports of workplace health and safety concerns, where some employees have received severe burns and cuts, possibly due to inadequate training and health and safety policies.

The company has been facing political and public pressure to reduce its greenhouse gas emissions. Management is deciding whether to invest in electric arc furnaces to reduce its fossil fuel use. The project will require initial investment of $300 million with annual incremental cost and revenue projected as follows:

$ millions
Operating costs (160)
Revenue 190
Depreciation (25)

Parts of the furnaces being replaced can be sold now for a scrap value of $10 million. The new electric arc furnaces will require major maintenance every five years, which is expected to cost $0.1 million each time the maintenance is performed. Assume the new furnaces have no salvage value at the end of its useful life.

Titanium Ltdrequires a rate of return of 8%. Assume a time horizon of 12 years. Ignore tax implications.

Required:

  1. Compute the following for the investment proposal (present value tables are available on the next page):
    1. Net present value. (9 marks)
    2. Two estimates of the accounting rate of return, one with initial investment as the denominator and the other with average investment. (4 marks)

Describe each tier of environmental cost and provide one example for each tier that could be directly relevant to Titanium Ltd. (Around five sentences that cover the main points are sufficient).

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