Camus Black, process engineer, knew that the acceptance of a new process design

Question

Camus Black, process engineer, knew that the acceptance of a new process design would depend on its economic feasibility. The new process design required new equipment and an infusion of working capital. The equipment would cost $300,000 and its cash operating express would total $60,000 per year. The equipment would last for seven years but would need a major overhaul costing $30,000 at the end of the fifth year. At increase in working capital totaling $30,000 would also be needed at the beginning. This would be recovered at the end of the seven years. On the benefit side, Camus estimated that the new process would $135,000 per year in environmental costs (fines and cleanup costs avoided). The costs of capital is 10%. Ignore tax effects. Is it benefits to implement the new design process? ADDITIONAL REVENUE Dr. White Avard, plastic surgeon, had just returned from a conference during which she learned of a new surgical procedure for removing wrinkles around the eyes, reducing the time to perform the normal procedure by 50% . Given her student loan pressures, Dr. Avard was anxious to try out the new technique. By decreasing the time spent on eye treatments or procedure, she could increase her total revenues by performing more services within a work period. Unfortunately, in order to implement the new procedure, some special equipment costing $74,000 was needed. The equipment had an expected that her case revenues would increase by the following amounts: She also expected additional case expenses amounting to $3,000 per years. The cost of capital is 12%. Assume there are no income taxes. Should Dr. Avard buy the machine?

Explanation / Answer

Amount (in $) Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Cost of Equipment 300000.00 300000.00 Increase in working capital 30000.00 30000.00 Cash Operating expenses 60000.00 60000.00 60000.00 60000.00 60000.00 60000.00 60000.00 420000.00 Overhaul expenses 30000.00 30000.00 Present Value of expenses 384545.45 49586.78 45078.89 40980.81 55882.92 33868.44 30789.49 640732.77 Cost Savings per year 135000.00 135000.00 135000.00 135000.00 135000.00 135000.00 135000.00 945000.00 Sale of Machine 24000.00 24000.00 Present value of savings 122727.27 111570.25 101427.50 92206.82 83824.38 76203.98 81592.14 669552.34 NPV 28819.57 Thus, its beneficial to implement the new design process since the present value of cost savings exceed the present value of additional costs to be incurred.

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