Case 9 - Recycling?

Engineered Products Inc. (EPI) is a conglomerate with both manufacturing and service-based businesses. One of EPI's larger manufacturing plants has been asked to increase its recycling efforts or face a major increase in its disposal fees. EPI prides itself on being a good corporate citizen and has committed to taking any and all feasible actions to reduce the volume and weight of material it sends to the local landfill. The local landfill plans to increase disposal fees by $5 per ton. It is offering to rebate $5 for each ton less than the current 12-month average that the plant sends to the landfill. The plant does not foresee any changes in the current levels of waste generation due to volume or product changes.

Currently, the plant averages sending two containers per day to the landfill. The containers average 10 tons of waste when loaded. The landfill charges $40 per ton to receive the waste. The waste hauler charges $80 per load (one container) to transport the waste. The three waste containers are rented for $5 per container per day.

Currently, cardboard, if collected and bundled for shipment, can be sold for $95 per ton. The plant estimates that it sends 2 tons of cardboard a day to the landfill. To collect the cardboard will require one janitorial associate for 3 hours per day at a cost of $18.50 per hour. The baling equipment will cost $22,000 installed, $45 per week to operate, $4500 per year to maintain, and last 12 years. The equipment will have a salvage value of $5000.

Currently, 25,000 wooden pallets per year are scrapped each year because they are damaged or because they are not of the standard size used by the plant. The plant has budgeted $12,000 for a pallet shredder to chip the pallets as they go into the waste containers to reduce their volume and allow the average weight per container to increase to 11 tons. The shredder has no salvage value at the end of its 6-year useful life. The operating and maintenance cost (not including the operator, a janitorial associate) is $3000 per year. The pallets average 13 pounds each.

A pallet recycler has offered to purchase pallets, which are of certain sizes and in good condition. The pallets that are in these sizes and in acceptable condition amount to half the scrapped pallets. The pallet recycler is offering to pay $1.00 per pallet. To sort the acceptable sizes from the scrap pallets will require three hours of labor per day. This job can also be done by a janitorial associate.

Purchasing has identified a company that will pick up the damaged and unusable pallets and process them into wood chips, which this company then sells. The cost of this service is $1.25 per pallet.

The plant works 5 days a week, 50 weeks a year. The minimum attractive rate of return is 15%.

What do you recommend the plant do?

Case 34 - R&D Device at EBP

Two years ago East Beach Products (EBP) designed and built in-house an R&D device to measure a critical parameter in evaluating new designs. Based on lessons learned, the testing engineers have found a generic device which can be modified to measure the critical parameter and which eliminates most of the operating problems inherent in the existing design. You have been tasked with evaluating the device's replacement in a time of tight capital and operating budgets.

The old device was built for $100,000 and currently has a book value of $48,000. The useful life of the device was estimated at 8 years. The device has no market value but can be scrapped and cannibalized for parts/computers/controls valued at $40,000 today and $5000 less in any succeeding year. Currently, the device costs $32,000 per year to operate (labor and material usage) and another $15,000 per year to maintain. Operating costs are increasing at the rate of $3200 per year (mostly in higher material usage rates) while maintenance costs are increasing at $2300 per year.

The new device will cost $125,000 after modification by the supplier. The new device is also projected to have a useful life of 10 years. The device is expected to have an operating cost of $26,000 for the first year which increases by 10% each year. The maintenance costs for the device are estimated at $8000 per year and are expected to increase at the rate of $1500 per year. The salvage value is estimated at $98,000 at the end of the first year and $8,000 less each year thereafter.

What is the economic life of each device? What is your recommendation if the device will be needed for a long but indefinite period into the future?

EBP uses a before-tax MARR of 10%.

Options:

1. What is your recommendation if the device is only used on an R&D project, which should terminate in 6 more years?

2. What is your recommendation if the after-tax MARR is 6%, and the after-tax rate is 40%?

Please add the following to the assignment details:

A large portion of the grade assigned for this extra credit will be based on effort and the quality of your write-up.  Please do a careful job writing up your analysis and results.  Excel sheets without accompanying text descriptions with not receive good scores.

Problem 1: Case 9:

Do case 9 from the included with your textbook (also attached to this assignment). For this case please decide on an approach for both the cardboard recycling problem and the pallet elimination problem using present worth analysis. In doing this exercise, make the following assumptions

1. The containers are full when they are taken away-the two containers a day stated in the case is the average, not a requirement.

2. The baseline for the rebate of $5/ton does not change from year to year.

3. The cardboard and pallet decisions are mutually exclusive.

4. The cardboard recycling decision should be made based upon a twelve-year life (the life of the cardboard bailer the plant would purchase).

5. All pallet decisions are made with a common six-year life (the life of the shedder the plant would purchase).

6. The higher tonnage density (11 tons/container) is used when calculating the savings due to hauling in the non-in-house scenarios-doing so yields estimates that are more conservative.

Note that projects for the book are based on real world cases and in many ways are ambiguous. You will need to make reasonable assumptions to do these projects. Your assumptions should be carefully described and as much as possible justified in the project report.

Problem 2: case 34:

This is an individual assignment and should be done without human help. Use of a computer (and Excel) is fine. The assignment is worth 10 pts towards your exam grade.

Do case 32 from the CD included with your textbook (also attached to this assignment). For this case please calculate the economic life for the defender and the challenger. Based on this analysis, recommend when (if ever) the defender should be replaced with the challenger. Do your analysis two ways: before tax and after tax. Do not worry about the "options" listed for this case.

Note that projects for the book are based on real world cases and in many ways are ambiguous. You will need to make reasonable assumptions to do these projects. Your assumptions should be carefully described and as much as possible justified in the project report.