Question

Need this answer in less than 30 mins Please!

Vollie Company, produces trucks. Considering the environment and following government rule, the company is considering changing its degreaser machine to clean water from engine oil, before the water is thrown to the creek behind the factory. This investment requires $ 5 000 000. The machine needs a special installation and it costs $ 50 000. It is estimated that this machine will last five years with $ 500 000 salvage value. The expected incremental after-tax cash flows (cash flows of the new machine minus cash flows of the old machine) associated with the investment are as follow:

YEAR	CASH BENEFITS	CASH EXPENSES
1	$3 200 000	$1 800 000
2	3 300 000	1 100 000
3	3 900 000	3 000 000
4	3 100 000	2 750 000
5	2 900 000	1 750 000

Vollie has a cost of capital equal to 14%. The company applies a straight-line depreciation method.

REQUIRED:

1.    Compute the Accounting Rate of Return (1 mark)

2.    Calculate the NPV of the proposed project

3.    Based on payback and NPV, provide your opinion, should accept or reject the project. Justify your answer (1 mark)

4.    Explain the impacts of your decision in (3) to the business sustainability/ environmental performance

Answer 1

1. Accounting Rate of Return

= Average incremental income / Initial Investment * 100

Depreciable Amount = 5000000 + 50000 - 500000 = 4,550,000

Average incremental income = (1800000+1100000+3000000+2750000+1750000) - 4550000 / 5

= 1170000

Average Investment = (5050000 + 500000) / 2

= 2775000

ARR = 1170000 / 2775000 * 100

= 42.16%

2. NPV of the Project

Year	Cash Flows	Discounting Factor	Present Value
0	($5,050,000)	1.000	($5,050,000)
1	$1,800,000	0.877	$1,578,947
2	$1,100,000	0.769	$846,414
3	$3,000,000	0.675	$2,024,915
4	$2,750,000	0.592	$1,628,221
5	$1,750,000	0.519	$908,895
		NPV =	$1,937,392

3. Conclusion: Since both Payback and NPV is positive, the company should accept the proposal.

4. There can be multiple factors which asks for our businesses to remain environmentally sustainable.

The first point to consider is the fact that moving towards environmentally sustainable practices presents few or no risks to business operations. If a business acts now and environmental sustainability continues to become an increasingly important and heavily regulated issue, you will have a head start over many of your competitors. Besides some initial outlay involved in moving towards environmental sustainability, there are not likely to be any long term negative impacts or expenses incurred.

Also in the long term, you may be reducing your expenses against regulatory penalties, which will anyways come into play more strongly with time.

The third thing, it will also make an impressive imagine for your organisation in the eyes of the public. It will eventually lead to the customers automatically being attracted towards your company, thus also increasing the revenue, the most important motive for a business entity.

Considering above factors, it can be said that this company will ultimately gain in the long run after investing in the proposed project.