Question

Carlisle Company has been cited and must invest in equipment to reduce stack emissions or face EPA fines of $18,500 per year. An emission reduction filter will cost $75,000 and have an expected life of 5 years. Carlisle’s MARR is 10%/year.

a. What is the annual worth of this investment?
b. Is the filter economically justified? Why?

Answer 1

The annual worth of the investment is negative. The investment is not economically justified.

Step-by-step explanation:

The annual worth of the investment can be calculated using the net present value (NPV) method. NPV is the present value of cash inflows minus the present value of cash outflows.

In this case, the cash inflow consists of the annual savings from avoiding EPA fines, which is $18,500 per year. The cash outflow is the initial cost of the emission reduction filter, which is $75,000.

Using a discount rate of 10%, the NPV can be calculated as follows:

NPV = Cash inflow - Cash outflow = $18,500 - $75,000 = -$56,500

Since the NPV is negative, the annual worth of this investment is also negative. This means that the investment is not economically justified, as it would result in a loss for the company.

Answer 2

equivalent annual cost: 19,784.81

The investment is not economically justified as it is cheaper to pay the fines than invest in the equipment to avoid them.

Step-by-step explanation:

We calcualte the PMT of a 75,000 dollars equipment at 10%

`PV / (1-(1+r)^(-time) )/(rate) = C\\`

PV 75,000

time 5

rate 0.1

`75000 / (1-(1+0.1)^(-5) )/(0.1) = C\\`

C $ 19,784.811

EPA fines: $ 18,500.00

differential: (1, 284.81)