FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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
| Amount to be invested | 40000000 | |
| Present value of annual net |
? | |
| Net present value | ? |
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