Engineered Products Inc. (EPI) is a conglomerate with both manufacturing and ser
ID: 2738791 • Letter: E
Question
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 to the current levels of wasted 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 wasted. 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, $4,500 per year to maintain, and last 12 years. The equipment will have a salvage value of $5,000. 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 $3,000 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 the 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?
Also 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 decision 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 shredder the plant would purchase). 6. The higher dtonnage 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. 7. Use reasonable assumptions to do this project, and assumptions should be carefully described and justified.
Explanation / Answer
It is assumed that a year contains 5 days* 50 weeks=250 days.
Proposed increase in disposal fees=$5 per ton.
Proposed decrease in fees =$5 per ton if the current disposal is less than the current 12 month average .
Number of container sent per day=2 containers.
Weight of the content in the container each time=10 tons.
Cost per ton by the landfill to receive each ton=$40.
Cost of transportation for one container=$80.
Number of containers rented per day=$5 per container per day.
Sale price of the cardboard per ton=$95.
Number of tons of card board sent per day to the landfill=2.
Collection manpower requirement=1 man power *for 3 hours * @ $18.50 per hour=$55.50.
Cost of the bailing equipment=$22,000.
Operating cost per week=$45.
Cost of maintenance per year=$4,500.
Life of the equipment=12 years.
Salvage value of the equipment=$5,000.
Therefore, ECI must consider to sell the card boards.
Wooden pallets:
Number of wooden pallets sent per year=25,000.
Cost of the pallet shredder=$12,000.
Salvage value of the shredder=0.
Life of the shredder=6 years.
Operating and maintenance cost for the shredder=$3,000 per year.
Weight of each pallet=13 pounds.
Hence, it is not a profitable decision to sell the pallets to recycler.
Cost of grading per pallet =$1.25.
Sale price of graded pallets=$1.00.
As the sale price is less than the cost of grading per pallet. It is not a profitable decision to engage the thrid party to grade the pallets.
Scrap decision:
one ton=2,240 pounds.
Weight of each pallet=13 pounds.
Total weight of 25000 pallets=13*25000=325000 pounds.
Number of tons per year=325000/2240
=145 tons.
As there increase in cost with out savings that justify the purchase of shredder, it is not acceptable decision to buy the shredder.
Particulars Amount Remarks Amount earned per ton of card board 95 Number of tons of card board sent per day 2 number of tons of cardboard sent per year 500 Amount earned on sale of cardboard 47500 (A)=50*95 Costs: Man power cost per day 55.5 Man power cost per year 13875 (B)=55.5*5*50 Cost of operating the bailer per week 45 Cost of operating the bailer per year 2250 (C )=45*50 Cost of maintenance per year 4500 (D) Amount earned after costs 26875 Present value annuity factor for 12 years @ 15% 5.420618999 Present value of earning on sale of cardboards 145679.1356 Add: Present value of salvage value 934.5357509 Total savings on disposal charges as 2 tons are not sent per day 2500 Present value of savings on disposal 13551.5475 (E ) Total cash inflows on deciding the sell card board 160165.2188 Less: Cost of bailer equipment 22000 NPV of the decision to sell card board 138165.2188Related Questions
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