A manufacturer receives components, that go into its products, in cardboard boxe

Question

A manufacturer receives components, that go into its products, in cardboard boxes. The company is currently paying a fee of $16,000 per year to have the discarded boxes picked up and hauled away to a landfill for disposal. A local paperboard recycler is willing to pay the company $4,000 per year for the cardboard, but they will not pick up the cardboard at the plant. The manufacturer estimates that it would cost them $12,000 per year to haul the cardboard to the recycler, which means they would only break even, but if they installed a compactor for the boxes, the hauling cost would drop to $5,000 per year. The compactor will cost $14,000 to install and $1,000 per year to operate. Which option is the best investment, based on the internal rate of return? Assume a five-year life for the compactor and a 10 percent discount rate. 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 $5,000 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 for reuse. Now, which is the best option?

Explanation / Answer

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7.10

For the first case no internal rate of return.

For the second one, IRR = 12000/4000 = 3.

For the third one, IRR = ((14000*0.90)+5000) /5000 =3.52

therefore, third investment option is the best.

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