Paper reclaim capital investment analysis The Victor Paper Company manufactures paper products from pulp. The process creates paper scrap from paper trim, off-grade, and machine errors. Presently, the scrap paper is discarded in a landfill. Management is considering a proposal for a scrap paper reclamation system. The system is designed so that paper is discarded in vacuum collection points located throughout the plant. The vacuum system would be attached to a reclaim process that would digest the scrap paper, turning it back into pulp, and then blending the reclaimed product back into the papermaking process with virgin (new) pulp. The blended stream is termed “blended pulp.” It has been determined that the quality of the final product is not adversely impacted by using blended pulp versus using 100% virgin pulp. In addition, the cost of the reclaimed pulp is considered “free” to the blended stream, and causes the amount of virgin pulp used in the blended stream to be less than would be otherwise. These factors reduce the cost of the blended stream. Some information involving this proposal is as follows: Reclaim system investment cost   $40,000,000   Annual operating cost of reclaim system   $500,000   Cost of virgin pulp   $600 per ton   Cost of blended pulp   $560 per ton   Finished processing volume   1,200 tons per day   Operating days per year   360     a. Determine the annual cost savings from using blended pulp. $16,780,000 b. Prepare a capital investment analysis using net present value to determine if the reclamation system is justified. Assume a 10-year life and 8% minimum rate of return. (Use the present value tables in Appendix A.) Round present value calculations to the nearest dollar. Amount to be invested   40000000 Present value of annual net cash flows   ? Net present value   ?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

Paper reclaim capital investment analysis

The Victor Paper Company manufactures paper products from pulp. The process creates paper scrap from paper trim, off-grade, and machine errors. Presently, the scrap paper is discarded in a landfill. Management is considering a proposal for a scrap paper reclamation system. The system is designed so that paper is discarded in vacuum collection points located throughout the plant. The vacuum system would be attached to a reclaim process that would digest the scrap paper, turning it back into pulp, and then blending the reclaimed product back into the papermaking process with virgin (new) pulp. The blended stream is termed “blended pulp.” It has been determined that the quality of the final product is not adversely impacted by using blended pulp versus using 100% virgin pulp. In addition, the cost of the reclaimed pulp is considered “free” to the blended stream, and causes the amount of virgin pulp used in the blended stream to be less than would be otherwise. These factors reduce the cost of the blended stream. Some information involving this proposal is as follows:

Reclaim system investment cost   $40,000,000  
Annual operating cost of reclaim system   $500,000  
Cost of virgin pulp   $600 per ton  
Cost of blended pulp   $560 per ton  
Finished processing volume   1,200 tons per day  
Operating days per year   360  

 

a. Determine the annual cost savings from using blended pulp.
$16,780,000

b. Prepare a capital investment analysis using net present value to determine if the reclamation system is justified. Assume a 10-year life and 8% minimum rate of return. (Use the present value tables in Appendix A.) Round present value calculations to the nearest dollar.

Amount to be invested   40000000
Present value of annual net cash flows   ?
Net present value   ?

 

 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 1 images

Blurred answer
Knowledge Booster
Costing for Spoilage, rework and scrap
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education