An oil refinery must now begin sending its waste liquids through a costly treatm
ID: 2466703 • Letter: A
Question
An oil refinery must now begin sending its waste liquids through a costly treatment process before discharging them. The engineering department estimates costs at $300,000 for the first year. It is estimated that if process and plant alterations are made, the waste treatment cost will decline $30,000 each year. As an alternate, a specialized firm. Hydro-Clean, has offered a contract to process the waste liquids for 10 years for $150,000 per year. Either way. there should be no need tor waste treatment after 10 years. Use an 8% interest rate and annual cash flow analysis to determine whether the Hydro-Clean offer should be accepted.Explanation / Answer
NPV of Alternative 1 = $691,202.22
NPV of alternative 2 = $779,304.94
Alternative 2 should be accepted .
Alternative 1 Alternative 2 Year Cash outflows Annual cash savings Net cash flows Year Cash outflows Annual cash savings Net cash flows 1 ($300,000) ($300,000) 1 ($150,000) ($150,000) $0 2 ($270,000) $30,000 ($270,000) 2 ($150,000) ($120,000) $30,000 3 ($240,000) $60,000 ($210,000) 3 ($150,000) ($90,000) $60,000 4 ($210,000) $90,000 ($120,000) 4 ($150,000) ($60,000) $90,000 5 ($180,000) $120,000 $0 5 ($150,000) ($30,000) $120,000 6 ($150,000) $150,000 $150,000 6 ($150,000) $0 $150,000 7 ($120,000) $180,000 $330,000 7 ($150,000) $30,000 $180,000 8 ($90,000) $210,000 $540,000 8 ($150,000) $60,000 $210,000 9 ($60,000) $240,000 $780,000 9 ($150,000) $90,000 $240,000 10 ($30,000) $270,000 $1,050,000 10 ($150,000) $120,000 $270,000