What discount rate stephens be indifferent to installing

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Reference no: EM133009782

Stephens, Inc. refines (smelts) heavy metals and is a big polluter. The EPA recently fined Stephens $1,000,000 for their past violations and warned that Stephens would need to install scrubbers on their smoke stacks. The cost of the scrubbers is $600,000 and they have a 3-year life; at the end of 3 years Stephens will have to pay an additional $200,000 to remove and dispose of the scrubbers. The scrubbers also cost $200,000 per year in maintenance to keep them running properly. Stephens uses straight-line depreciation, has a tax rate of 30% and estimates the appropriate discount rate to be 10%. Alternatively, Stephens could choose not to comply and face a fine of $1,000 a day (paid annually in installments of $365,000, beginning in one year).

Problem 1: What is the NPV of installing the scrubbers?

Problem 2: What is the equivalent annual cost (EAC) of installing the scrubbers?

Problem 3: Is Stephens better off (in financial terms only) installing the scrubbers or paying the fine? At what discount rate would Stephens be indifferent to installing the scrubbers or paying the fine?

Reference no: EM133009782

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