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 $623,700 and will cost $44,180 in increased annual operation plus an annual purchase of $7,070 of filtration medium. However, management projects the following savings: Water usage $ 67,760 Chemical usage 42,070 Sludge disposal 90,320 Recovered metal sales 45,170 Sampling of discharge 120,220 Total $ 365,540 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 company’s 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. Required: 1. Based on the financial data provided, prepare a schedule of expected cash flows. Enter cash outflows as negative amounts and cash inflows as positive amounts. Heaps Company Schedule of Expected Cash Flow Year 0 $fill in the blank Year 1: Operating costs $fill in the blank Savings fill in the blank Depreciation shield fill in the blank Total $fill in the blank Years 2–7: Operating costs $fill in the blank Savings fill in the blank Depreciation shield fill in the blank Total $fill in the blank Year 8: Operating costs $fill in the blank Savings fill in the blank Depreciation shield fill in the blank Total $fill in the blank Years 9–10: Operating costs $fill in the blank Savings fill in the blank Total $fill in the blank
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 $623,700 and will cost $44,180 in increased annual operation plus an annual purchase of $7,070 of filtration medium. However, management projects the following savings:
| Water usage | $ | 67,760 |
| Chemical usage | 42,070 | |
| Sludge disposal | 90,320 | |
| Recovered metal sales | 45,170 | |
| Sampling of discharge | 120,220 | |
| Total | $ | 365,540 |
The equipment qualifies as a seven-year MACRS asset. Management has decided to use straight-line
The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.
Required:
1. Based on the financial data provided, prepare a schedule of expected cash flows. Enter
| Heaps Company | |
| Schedule of Expected Cash Flow | |
| Year 0 | $fill in the blank |
| Year 1: | |
| Operating costs | $fill in the blank |
| Savings | fill in the blank |
| Depreciation shield | fill in the blank |
| Total | $fill in the blank |
| Years 2–7: | |
| Operating costs | $fill in the blank |
| Savings | fill in the blank |
| Depreciation shield | fill in the blank |
| Total | $fill in the blank |
| Year 8: | |
| Operating costs | $fill in the blank |
| Savings | fill in the blank |
| Depreciation shield | fill in the blank |
| Total | $fill in the blank |
| Years 9–10: | |
| Operating costs | $fill in the blank |
| Savings | fill in the blank |
| Total | $fill in the blank |
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