The Johnson Company pays $2,000 a month to a trucker to haul wastepaper and card

Question

The Johnson Company pays $2,000 a month to a trucker to haul wastepaper and cardboard to the city dump. The material could be recycled if the company were to buy a $60,000 hydraulic press baler and spend $30,000 a year for labor to operate the baler. The baler has an estimated useful life of 30 years and no salvage value. Strapping material would cost $2,000 per year for the estimated 500 bales a year that would be produced. A wastepaper company will pick up the bales at the plant and pay Johnson $23 per bale for them. Use an annual cash flow analysis and an interest rate of 8% to recommend whether it is economical to install and operate the baler.

Explanation / Answer

Initial cost of baler $60,000

Labor cost $30,000 / year

Strapping cost $2,000 / year

Annual benefits $23 x 500 = 11,500

Interest rate 8% per year; useful life 30 years

Annual cash flow analysis:

EUAW = P(A/P,8%,30) – L(A/P,8%,30) – S(A/P,8%,30) + AB(A/P,8%,30)

EUAW = .60,000*0.0888 – 30,000*0.0888 – 2000*0.0888 + 11,500*0.0888

EUAW = $5,328 - 2,664 - 177.6 – 1,021.2

EUAW = $3,507.6.

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