Reference no: EM133002351

Question - On January 1st 2022, Glass Inc (GI) is considering implementing a recently developed recycling process named EnviroClean. GI's original Ultra-Cycle process cost $20,000,000 to implement on January 1st 2019. In the old Ultra-Cycle process, glass is crushed, melted, and then recycled into new glass products. In the proposed EnviroClean process crushing the glass is unnecessary. Using new technology, in the EnviroClean process, glass is directly melted and then recycled into new glass products. Given some similarities in the two processes, it is estimated that 10% of the cost of the original Ultra-Cycle process is attributed to the cost of developing the proposed EnviroClean process. As a financial assistant with GI, you have been asked by GI's CFO to provide her with the information she needs to decide whether or not to take on the proposed EnviroClean project. If the analysis is in favor of this newly developed process, the new project will start at the beginning of next year (January 1st, 2022). Given the rapid development in recycling technology, it is anticipated that the EnviroClean process will be viable only for 5 years. You are told that GI's fiscal year-end is December 31st, and that the required return for the project is an annual effective rate of 26% and its corporate tax rate is 40%.

The proposed project would require the use of one of GI's abandoned warehouses as of January 1st 2022. Similar warehouses are rented out for $1,000/month paid at the beginning of each month. The cost of partially automating the operations of the warehouse will require that new machinery, valued at $35,000 is purchased. This machinery will be depreciated using the 7-year depreciation schedule. Upon completion of the proposed project, the new machinery will be sold for a value equivalent to its Undepreciated Capital Cost (UCC) at the time of the sale.

10 employees for the proposed project will be hired to begin work on January 1st 2022.

Each will work one hundred and seventy hours per month. They will be paid at the end of every month at a wage of $15,00 per hour for the duration of the project. Given the current labor shortage, this wage will certainly impact wages of workers currently employed in other operations of the firm. It is anticipated that the impact on current wages will increase expenses of GI's other operations by $20,000 per year indefinitely. Aware that the new service offered by the EnviroClean project will partially replace the old Ultra-Cycle process, you estimate that reduced Ultra-Cycle output will reduce GI's revenues by $200,000 each year. However, you are certain that the new EnviroClean products will increase revenues by $550,000 each year.

The CFOs team predicts that the proposed EnviroClean project will partially replace the old Ultra-Cycle process, you estimate that reduced Ultra-Cycle output will reduce GI's revenues by $200,000 each year. However, you are certain that the new EnviroClean products will increase revenues by $550,000 each year.

The CFOs team predicts that the proposed EnviroClean project will require the following levels of current assets and current liabilities items during the life of the project

What is the NPV of the proposed project and what is your recommendation?