7.10 solution. Problem 7.10 A manufacturer receives components, that go into its

Question

7.10 solution.

Problem 7.10 A manufacturer receives components, that go into its products, in cardboard boxes. The company is currently paying a fee ofS16,000 per year to have the discarded boxes picked up and hauled away to landfill for disposal. A local paperboard recycler is willing to pay the company S4,000 per year for the cardboard, but they will not pick up the cardboard at the plant. The manufacturer estimates that it would cost them S12,000 per year to haul the cardboard to the recycler, which means they would only break even, but ifthey installed acompactor for the boxes, the hauling cost would drop to $5,000 per year. The compactor will cost si4,000 to install and $1,000 per year to operate. Which option is the best investment, based on the internal rate ofreturn? Assume a five-year life for the compactor and a 10 percent discount rate. Problem 7.11 The manufacturer in Problem 7.10 is discussing an arrangement with its parts supplier whereby the boxes would be shipped back to the supplier for reuse, rather than disposing of them. The supplier would rebate the company S5,000 per year for the returned boxes. The manufacturer estimates that it will cost $14.000 per year to ship back the flattened (non-compacted boxes forreuse. Now,which is the best option?

Explanation / Answer

Hi,

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IRR is also high in this case =14000/5000=2.8 but less than 3.52.

So previous one i.e, one with compactor machine was more better than the given option

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