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: fill in the blank Operating costs fill in the blank Savings fill in the blank Total $fill in the blank Feedback Use the decomposition approach to determine annual after tax cash flows. Be careful to consider whether individual items result in an increase in cash flow or a decrease before adding them together. 2. What is the payback period? Round your answer to two decimal places. fill in the blank years 3. Calculate the NPV of the closed-loop system. Round intermediate calculations and the final answer to the nearest dollar. $fill in the blank 4. The calculation in Requirement 3 ignored several factors that could affect the project’s viability: savings from avoiding the annual fines, positive effect on sales due to favorable environmental publicity, increased plating quality from the new system, and the avoidance of the lawsuit. Suppose, for example, that the annual fines being incurred are $74,710, the sales effect is $59,710 per year, the quality effect is not estimable, and cancellation of the lawsuit because of the new system would avoid an expected settlement at the end of Year 3 (including legal fees) of $308,600. Assuming these are all after-tax amounts, what effect would their inclusion have on the payback period? On the NPV? Round payback to two decimal places and round NPV calculation and final answer to the nearest dollar. Payback Decreases by fill in the blank years NPV Increases by $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 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: fill in the blank Operating costs fill in the blank Savings fill in the blank Total $fill in the blank Feedback Use the decomposition approach to determine annual after tax cash flows. Be careful to consider whether individual items result in an increase in cash flow or a decrease before adding them together. 2. What is the payback period? Round your answer to two decimal places. fill in the blank years 3. Calculate the NPV of the closed-loop system. Round intermediate calculations and the final answer to the nearest dollar. $fill in the blank 4. The calculation in Requirement 3 ignored several factors that could affect the project’s viability: savings from avoiding the annual fines, positive effect on sales due to favorable environmental publicity, increased plating quality from the new system, and the avoidance of the lawsuit. Suppose, for example, that the annual fines being incurred are $74,710, the sales effect is $59,710 per year, the quality effect is not estimable, and cancellation of the lawsuit because of the new system would avoid an expected settlement at the end of Year 3 (including legal fees) of $308,600. Assuming these are all after-tax amounts, what effect would their inclusion have on the payback period? On the NPV? Round payback to two decimal places and round NPV calculation and final answer to the nearest dollar. Payback Decreases by fill in the blank years NPV Increases by $fill in the blank
Corporate Financial Accounting
14th Edition
ISBN:9781305653535
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Carl Warren, James M. Reeve, Jonathan Duchac
Chapter10: Liabilities: Current, Installment Notes, And Contingencies
Section: Chapter Questions
Problem 10.1EX: Current liabilities Bon Nebo Co. sold 25,000 annual subscriptions of Bjorn for 85 during December...
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100%
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 $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: | fill in the blank |
| Operating costs | fill in the blank |
| Savings | fill in the blank |
| Total | $fill in the blank |
Use the decomposition approach to determine annual after tax cash flows. Be careful to consider whether individual items result in an increase in cash flow or a decrease before adding them together.
2. What is the payback period? Round your answer to two decimal places.
fill in the blank years
3. Calculate the
$fill in the blank
4. The calculation in Requirement 3 ignored several factors that could affect the project’s viability: savings from avoiding the annual fines, positive effect on sales due to favorable environmental publicity, increased plating quality from the new system, and the avoidance of the lawsuit.
Suppose, for example, that the annual fines being incurred are $74,710, the sales effect is $59,710 per year, the quality effect is not estimable, and cancellation of the lawsuit because of the new system would avoid an expected settlement at the end of Year 3 (including legal fees) of $308,600. Assuming these are all after-tax amounts, what effect would their inclusion have on the payback period? On the NPV? Round payback to two decimal places and round NPV calculation and final answer to the nearest dollar.
| Payback | Decreases | by | fill in the blank | years |
| NPV | Increases | by | $fill in the blank |
Transcribed Image Text:EXHIBIT 19B.2
Present Value of an Annuity of $1 in Arrears*
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
1
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
1.392
1.868
2
1.942
1.866
1.833
1.783
1.736
1.690
1.647 1.605
1.566
1.528
1.492
1.457
1.424
1.361
1.331
1.224
2.174
2.690
3.127
2.042
2.494
2.864
1.923
2.320
2.635
1.816
2.166
2.436
1.589
1.849
2.035
2.884
2.775
2.673
2.577 2.487
2.402
2.322 2.246
2.106
1.981
2.404
1.766
3.808
4.713
2.914 2.798
3.433 3.274
2.241
2.532
4
3.630
3.465
3.312
3.170
3.037
2.589
2.096
3.993
4.623
4.452
4.212
3.791
3.605
2.991
2.745
2.345
3.326
3.605
6.
5.601
5.242
4.917
4.355
4.111
3.889 3.685
3.498
3.167
3.020
2.885
2.759
2.643
2.534
2.168
4.288 4.039
4.639 4.344
4.946 4.607
5.216 4.833
7.
6.472
6.002
5.582
5.206
4.868
4.564
3.812
3.416
3.242
3.083
2.937
2.802
2.677
2.263
8.
7.325
6.733
6.210
5.747
5.335
4.968
3.078
3.837
3.619
3.421
3.241
3.076
2.925
2.786
2.331
7.435
8.111
3.184
3.269
9.
8.162
6.802
6.247 5.759
5.328
5.650
4.303
4.031
4.192
4.327
4.439
4.533
3.786
3.923
3.566
3.682
3.776
3.851
3.366
3.465
3.019
2.868
2.930
2.379
2.414
10
8.983
7.360
6.710 6.145
4.494
3.092
9.787
10.575
11.348
8.760
9.385
9.986
7.887
8.384
8.853
4.656
4.793
4.910
5.008
5.092
11
7.139 6.495
5.938
5.453 5.029
4.035
3.543
3.335
3.147
2.978
2.438
6.194
6.424
4.127
4.203
3.606
3.656
3.387
3.427
3.190
3.223
3.013
3.040
12
7.536
6.814
5.660 5.197
2.456
13
7.904 7.103
5.842 5.342
3.912
2.469
14
12.106 10.563
8.244 7.367
9.295
9.712
6.628
6.002 5.468
4.611
4.675
4.265
3.962
3.695
3.459
3.483
3.249
3.061
2.478
15
12.849 11.1 18
8.559 7.606
6.811
6.142 5.575
4.315
4.001
3.726
3.268
3.076
2.484
16
13.578 11.652 10.106
8.851
7.824
6.974
6.265 5.668
5.162
4.730
4.357
4.033
3.751
3.503
3.283
3.088
2.489
17
14.292 12.166 10.477
9.122 8.022
7.120
6.373 5.749
5.222
4.775
4.391
4.059
3.771
3.518
3.295
3.097
2.492
18
14.992 12.659 10.828
6.467 5.818
9.372 8.201
9.604 8.365
7.250
5.273
4.812
4.419
4.080
3.786
3.529
3.304
3.104
2.494
19
15.678 13.134 11.158
7.366
6.550 5.877
5.316
4.843
4.442
4.097
3.799
3.539
3.311
3.109
2.496
3.113
3.116
3.118
16.351 13.590 11.470
9.818 8.514
3.316
3.320
20
7.469
6.623 5.929
5.353
4.870
4.891
4.460
4.476
4.110
4.121
4.130
3.808
3.546
3.551
3.556
2.497
5.384
5.410
21
17.011 14.029 11.764 10.017 8.649
7.562
6.687 5.973
3.816
2.498
22
17.658 14.451 12.042 10.201 8.772
7.645
6.743 6.011
4.909
4.488
3.822
3.323
2.498
23
18.292 14.857 12.303 10.371
8.883
7.718
6.792 6.044
5.432
4.925
4.499
4.137
3.827
3.559
3.325
3.120
2.499
24
18.914 15.247 12.550 10.529 8.985
7.784
6.835 6.073
5.451
4.937
4.507
4.143
3.831
3.562
3.327
3.121
2.499
2.499
2.500
2.500
2.500
4.147
4.151
3.564
3.566
3.122
3.123
25
19.523 15.622 12.783 10.675 9.077
7.843
7.896
7.943
7.984
6.873 6.097
5.467
5.480
4.948
4.956
4.514
4.520
4.524
4.528
4.531
3.834
3.329
3.330
26
20.121 15.983 13.003 10.810 9.161
6.906 6.118
3.837
5.492
5.502
4.964
4.970
4.975
4.979
3.123
3.124
27
20.707 16.330 13.211
10.935 9.237
6.935 6.136
4.154
3.839
3.567
3.331
4.157
4.159
3.568
3.569
28
21.281 16.663 13.406
11.051 9.307
6.961 6.152
3.840
3.331
29
21.844 16.984 13.591 11.158 9.370
8.022
6.983 6.166
5.510
3.841
3.332
3.124 2.50o
30
22.396 17.292 13.765 11.258 9.427
8.055
7.003 6.177
5.517
4.534
4.160
3.842
3.569
3.332
3.124
2.500
*P, = (1/) x [1 - 1/(1 + 0").
Transcribed Image Text:EXHIBIT 19B.1
Present Value of $1*
Periods
2%
4%
6%
৪%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
32%
40%
0.980
0.961
0.962
0.925
0.943
0.890
0.926
0.857
0.862
0.743
0.794
0.630
0.769
0.592
0.758
0.574
0.909
0.826
0.751
0.683
0.877
0.769
0.833
0.694
0.820
0.672
0.781
0.610
1
0.893
0.797
0.847
0.806
0.650
0.714
0.510
0.364
0.7 18
0.641
0.552
0.942
0.889
0.840
0.794
0.712
0,675
0.609
0.579
0.551
0.524
0.500
0.477
0.455
0.435
4
0.924
0.855
0.792
0.735
0.636
0.592
0.516
0.482
0.451
0.423
0.397
0.373
0.350
0.329
0.260
5
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
0.133
0.095
6.
0.888
0.871
0.790
0.760
0.705
0.665
0.636
0.583
0.564
0.513
0.507
0.452
0.456
0.400
0.410
0.354
0.370
0.314
0.335
0.279
0.303
0.275
0.222
0.250
0.198
0.227
0.207
0.189
0.143
7
0.249
0.178
0.159
0.853
0.837
0.820
0.804
0.788
0.627
0.592
0.558
0.527
0.497
0.469
0.233
0.194
0.162
0.139
0.108
0.085
0.066
0.052
0.204
0.108
0.082
0.062
0.046
0.036
8
0.731
0.540
0.467
0.404
0.351
0.305
0.266
0.179
0.157
0.123
0.068
0.424
0.386
0.350
0.319
0.361
0.322
0.263
0.227
0.195
0.168
0.125
0.099
0.079
0.062
0.094
0.073
0.056
0.043
0.048
0.035
0.025
0.018
9
0.703
0.500
0.308
0.225
0.167
0.144
0.676
0.650
0.625
0.270
0.237
10
0.463
0.191
0.137
0.116
0.429
0.397
0.162
0.137
0.116
0.112
0.092
0.094
0.076
11
0.287
0.135
12
0.257
0.208
0.112
13
0.773
0.601
0.368
0.290
0.229
0.182
0.145
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
16
0.025
0.728
0.714
0.534
0.513
0.394
0.292
0.270
0.218
0.163
0.146
0.123
0.093
0.080
0.071
0.060
0.054
0.045
0.042
0.032
0.026
0.019
0.015
0.012
0.005
17
0.371
0.198
0.108
0.034
0.020
0.015
0.012
0.009
0.003
0.700
0.686
0.673
0.130
0.116
0.104
0.069
0.060
0.051
0.044
0.051
0.043
0.037
0.028
0.023
0.019
18
0.494
0.350
0.250
0.180
0.095
0.038
0.021
0.016
0.012
0.009
0.007
0.002
0.475
0.456
0.439
0.083
0.073
0.007
0.005
19
0.331
0.232
0.164
0.031
0.017
0.012
0.009
0.005
0.002
0.312
0.294
0.278
20
0.215
0.149
0.026
0.014
0.010
0.007
0.004
0.001
21
0.660
0.199
0.135
0.093
0.064
0.031
0.022
0.015 0.011
0.008
0.006
0.004
0.004
0.003
0.001
22
0.647
0.422
0.184 0.123
0.083
0.056
0.038 0.026 0.018
0.013
0.009
0.006
0.003 0.002 0.001
0.262
0.247
0.233
0.220
0.207
0.049
0.043
0.038
0.033
0.029
0.026
0.002
0.001
0.001
0.001
0.001
0.000
0.000
0.000
0.000
23
0.634
0.406
0.390
0.170
0.112
0.074
0.033 0.022 0.015
0.010
0.007
0.005
0.003
0.002
0.622
0.610
0.598
0.586
0.102
0.092
0.084
0.076
0.069
24
0.158
0.066
0.028 0.019
0.013
0.008
0.006
0.004
0.003
0.002
0.146
0.135
0.125
0.059
0.053
0.047
0.042
0.001
0.001
0.001
0.001
25
0.375
0.024 0.016
0.010 0.007 0.005 0.003
0.002
0.361
0.347
0.021
0.018
0.014
0.011
0.000
0.000
0.000
0.000
26
0.009 0.006
0.004 0.002 0.002
0.005
0.004
0.003
0.003
0.003
0.002
0.002
0.002
0.001
0.001
0.001
27
0.007
28
0.574
0.333
0.196
0.116
0.016
0.010
0.006
0.321
0.308
29
0.563
0.185
0.107
0.063
0.037
0.022
0.014
0.008
0.005
0.002
0.001
0.000
0.000
30
0.552
0.174
0.099
0.057
0.033
0.020
0.012
0.007
0.004
0.002
0.001
0.001
0.000
0.000
0.000
*P, = A/(1 + i)".
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