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Camus Blalack, process engineer, knew that the acceptance of a new process design would depend on its economic feasibility. The new process design required new equipment and an infusion of working capital. The equipment would cost $300,000 and its cash operating expenses would total $60,000 per year. The equipment would last for seven years but would need a major overhaul costing $30,000 at the end of the fifth year. At the end of seven years, the equipment would be sold for $24,000. An increase in working capital totaling $30,000 would also be needed at the beginning. This would be recovered at the end of the seven years.

On the benefit side, Camus estimated that the new process would save $135,000 per year in environmental costs (fines and cleanup costs avoided). The cost of capital is 10%. Ignore tax effects.

Is it beneficial to implement the new design process?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M945209

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