In an effort to reduce cost and become a greener organization, ACME Corporation
ID: 2725353 • Letter: I
Question
In an effort to reduce cost and become a greener organization, ACME Corporation is interested in reducing its costs associated with the disposal of cardboard packaging from their production facility. Currently. ACME pays a local firm $2000 per month to pick up and haul their cardboard materials to the local landfill. The cardboard could be recycled if ACME purchases a hydraulic salvage value at the end of this period Operating the baler requires the following annual costs: $27,500 in labor and $2,250 for strapping material. ACME estimates that they will produce 450 bales of carboard per year which they would be able to sell to a local recycler for $20 per bale. Use an annual equivalent worth method to recommend whether it is economical to install and operate the baler. Assume ACME has an MARR of 9%.Explanation / Answer
Calculation of Annual Equivalent worth of Baler:
Year
Cash Flow (CF)
PVF (9%)
PV = CF*PVF
Annual Sales Revenue (450 bales* $20)
1 to 30
$ 9,000.00
10.27365
$ 92,462.89
Add: Saving in Annual Disposal Costs ($2000 * 12 Months)
1 to 30
$ 24,000.00
10.27365
$ 246,567.70
Less: Annual Operating costs (27500 + 2250) =
1 to 30
$ (29,750.00)
10.27365
$ (305,641.21)
Less: Cost of Baler
0
$ (62,500.00)
1.00000
$ (62,500.00)
Net Present Value (A)
$ (29,110.62)
PV of $ 1 Annuity (30 Years , 9%) (B)
10.27365
Annual Equivalent worth of Baler = A/B =
$ (2,833.52)
Hence installing the baler shall result in Negative annual equivalent worth, so it is not wise to install the baler.
Calculation of Annual Equivalent worth of Baler:
Year
Cash Flow (CF)
PVF (9%)
PV = CF*PVF
Annual Sales Revenue (450 bales* $20)
1 to 30
$ 9,000.00
10.27365
$ 92,462.89
Add: Saving in Annual Disposal Costs ($2000 * 12 Months)
1 to 30
$ 24,000.00
10.27365
$ 246,567.70
Less: Annual Operating costs (27500 + 2250) =
1 to 30
$ (29,750.00)
10.27365
$ (305,641.21)
Less: Cost of Baler
0
$ (62,500.00)
1.00000
$ (62,500.00)
Net Present Value (A)
$ (29,110.62)
PV of $ 1 Annuity (30 Years , 9%) (B)
10.27365
Annual Equivalent worth of Baler = A/B =
$ (2,833.52)
Hence installing the baler shall result in Negative annual equivalent worth, so it is not wise to install the baler.
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