Antee Farms is a poultry processing facility and processes 2 million birds per d

ID: 2786511 • Letter: A

Question

Antee Farms is a poultry processing facility and processes 2 million birds per day. Processing each bird requires seven gallons of water which the company buys from the city at two cents a gallon. One of the plant managers suggested that the company could save money by recycling and reusing the water It is estimated that 80 percent of the water used could be recovered and reused through recycling. A recycling plant costs S800 million dollars and could last for 15 years with no salvage value. Running and maintaining the equipment costs $0.5 million in the first year and increases by 10 percent per year irn subsequent years. a) How much money does the company spend on water per year without recycling? b) Given a discount rate of 10 percent, take steps to help determine whether the company should invest in the recycling equipment by estimating the the annual benefits of using the equipment i) the annual costs of using the equipment i)the present values of the annual benefits and cost of using the equipment ithe net present value of investing in the equipment. c) Should the company invest in the recycling equipment? Explain? d) Is your answer in part c based on private costs, social costs or both Explain.

Explanation / Answer

No of birds processed

2000000

Amount of water required per bird

7 gallons

Price per gallon

$0.02

Cost of water

$280,000.00

b. Annual benefits of using recycled water = 80%*280000 = 224000

Annual costs which increase @10% every year

Year

Initial cost

Maintenance

-800000000

-500000

-550000

-605000

-665500

-732050

-805255

-885780.5

-974358.55

-1071794.41

-1178973.85

-1296871.23

-1426558.35

-1569214.19

-1726135.61

-1898749.17

PV of annual benefits = 224000*(1-1.1^-15)/0.1

PV of annual costs = NPV(10%, Costs from year1-15) (We have used the excel NPV function)

= ($6,818,181.82)

NPV of the project = Sum of the above = ($5,114,420.01)-800m =

c. The company should not invest in the project since the NPV of costs is higher than the benefits of the project

d. The answer is based on private costs since there will be a social benefit by using recycled water which is not quantified in the problem above.