For some reason, even after reading the proper chapters, I still have NO CLUE wh
ID: 2436026 • Letter: F
Question
For some reason, even after reading the proper chapters, I still have NO CLUE where to start on this problem and it's a decent chunk of my grade (10%). Any help? In the solution, the calculations and computations must be shown and an interpretation of the computations to tell the company if they should purchase the required equipment or not is required.
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The Department of Environmental Science came to the Accounting Department with the following problem. If you correctly solve this problem I will add 10 percentage points to any one of your previous exams. Partial credit will be given for getting part of the problem correct. Remember to apply all the skills you have learned in Managerial Accounting.
A company daily uses 5 gallons of solvent in its manufacturing process. At the end of the day they take the dirty solvent and place it in 55 gallon drums to be sent to a hazardous waste disposal site. The Department of Environmental Science is trying to talk the company into purchasing a still which would clean up the solvent and allow a portion of it to be reused. The waste product from the still would have to be disposed in an approved hazardous waste disposal site but this would be much less volume of waste each day.
Your job is to calculate the net present value of the purchase of this still using 12% as the discount rate and the following criteria:
Cost of purchasing the still $ 22,000
Cost of installing the still $ 6,500
The still is expected to last eight years before it needs to be replaced.
Cost to purchase new solvent $ 5 per gallon
Cost to dispose of liquid waste solvent $ 200 per drum (55 gallons)
Cost to dispose of solid waste from still $ 350 per drum (solids can only fill a drum 80% full. Space between solids waste pieces cannot be used).
Recovery rate of clean solvent from the still: 80% (the remaining 20% is a solid disk about the size of a small dinner plate and about 3 inches thick)
Electricity to operate the still: 3 kilowatt hours. A batch requires 8
hours to process. (24 killowatt hours)
Cost of electricity per kilowatt hour: 8.2 cents per kilowatt hour
Still can hold 10 gallons of dirty solvent so,
three batches will need to be run each week.
Labor hours to operate and maintain the still = 3 ½ hours per week
Labor rate including insurance, taxes, etc = $20 per hour.
The company works 5 days per week and 52 weeks per year. (Use 260 working days per year).
Explanation / Answer
Cost of purchasing the still $ 22,000 Cost of installing the still $ 6,500 SO Net Cash Outflow in Y0 = 22000+6500 = 28500 The still is expected to last eight years before it needs to be replaced. Cost to purchase new solvent $ 5 per gallon. So 5 Gallons will cost 5*$5 = $25 per day Cost to dispose of liquid waste solvent $ 200 per drum (55 gallons). So drum will be full in 55/5 = 11 working days. Recovery rate of clean solvent from the still: 80% (the remaining 20% is a solid disk about the size of a small dinner plate and about 3 inches thick). So recovery per day is 5*80% = 4 Gallons = 4*$5 = $20 per day. Cost to dispose of solid waste from still $ 350 per drum (solids can only fill a drum 80% full. Space between solids waste pieces cannot be used). Still can hold 10 gallons of dirty solvent. SO Capacity of drum is 80% of 10 Gallons = 8 Gallons. Waste is 20% of 5 Gallon = 1 Gallon per day. SO drum will be full in 8 working days Electricity to operate the still: 3 kilowatt hours. A batch requires 8 hours to process. (24 killowatt hours) Cost of electricity per kilowatt hour: 8.2 cents per kilowatt hour Still can hold 10 gallons of dirty solvent so, three batches will need to be run each week. Cost of electricity per batch = 2KWh*8Hr*8.2c/KWh = 196.8c = $1.968 Cost of electricity per week (3 batches) = 3*1.968 = $5.904 Yearly cost of electricity = 52 weeks * $5.904 per week = $307.008 Labor hours to operate and maintain the still = 3 ½ hours per week Labor rate including insurance, taxes, etc = $20 per hour. Yearl Labour cost = 3.5Hr/week * 52 week*$20 /hr = $3640 WIth Still cost of Operation :- 1. Saving in Cost of Solvent per day = Cost of purchase - cost of recovered solvent = $25 - $20 = $5 So saving for 260 days = 260*$5 = $1300 2. Cost of disposal in Still case is 8 days = $350. SO for 260 days, the cost is 260*350/8 = $11,375 Cost of disposal without Still in 11 days is $200. So for 260 days, teh cost is 260*200/11 = $4,727.27 So Increase in Cost with Still = $11375 - $4727.27 = $6,647.73 3. Increase in Labor cost due to Still ops = $3640 4. Inc in Electricty cost due to still ops = $307.008 So Net Increase in cost due to still ops = $1300 - $6647.73 - $3640 - $307.008 = -9294.38 As there is a net increase in cost due to Installtion of Stills, this is not a recommended option. NPV calculation is not possible