Pollution externalities Essay example

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Words: 4566
Pages: 19
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Student name: Thao Lam – Yujuan Zeng
Student ID number: 10358677 – 10361478
Subject code: ECF6110
Due date: 7 October 2014
Name of Lecturer: Lee Lim
E-mail address: xnlam@our.ecu.edu.au –
Executive summary

Contents
Executive summary i
1. Introduction 1
1.1. Background 1
1.2. Limitations 1
1.3. Scope of the report 1
2. General consideration on background of projects 2
3. Explanation for cash flow tables 2
4. Comparing the two projects by using capital budgeting techniques 2
4.1. Net present value (NPV) 2
4.2. The payback period (PP) 2
4.3. Internal rate of return (IRR) 2
5. Ranking the two projects by using their Net Present Value (NPV) and Annual Net Present Value (ANPV) 2
6. Sensitivity analysis of the two projects 2
6.1. Break-even points of the two projects 2
6.2. Pessimistic scenario when the sale decreases 2
6.3. Pessimistic scenario when the after-tax cost of capital increases 2
6.4. Effect of inflation on the two projects 2
6.5. Effect of tax rates on the two projects 2
7. Conclusion 3
8. Recommendation 4
List of References 5
Appendix A: Cash Flow table for three gas-fired kilns I
Appendix B: Cash Flow table for twelve electric kilns II
Appendix C: Cash budgeting techniques III
Appendix D: NPV profiles IV
Appendix E: ANPV profiles V
Appendix F: Break-even points for both projects VI
Appendix G: Pessimistic scenario 1 – sales go down by 20% from estimated sales VII
Appendix H: Pessimistic scenario 2 – after-tax cost of capital increases by 3% IX
Appendix I: Effect of inflation X
Appendix J: Calculation of marginal tax rate of Bentley Custom Ceramics in 1999 XI

1 Introduction
1 Background
The report is prepared to assist the investment decision of acquiring additional facilities to expand existing production of the company. By building up cash flow tables of available projects, the report applies capital budgeting techniques and behavioural approaches to assess economic viability of the available projects, and therefore helping the company to choose the preferred alternative.

1.1. Limitations
1.2. Scope of the report

2. General consideration on background of projects
The company has alternatives in choosing new equipment, besides the electric kiln which had been used for years; there are also kilns fired by gas. Electric kilns are relatively easier and safer in operation since no flammable gas is used. However, gas fired kilns perform better in temperature control and make certain glazing colours possible, therefore provide higher level of consistency in production. Nevertheless, the main concern of the two types is the cost of energy usage. Gas kilns are much more cost effective than electric kilns in terms of utility expense. It is estimated that the productivity and capacity of 12 electric kilns is the same as 3 propane gas kilns. The utility expense per year of three model 10/92 gas fired kilns is less than a quarter of that using 12 general Lee-20 electric kilns, $512.74 and $2307.24 respectively ( see Figure 1).
Figure 1-Utility Expense of the two projects
Kiln Type
Capacity
Fuel/Avg Use
Unit Cost units Extra burns per year
Utility expense/ year
Model 10/92 Gas Fired Kiln
78 cu.ft
15.6lb/burn
$0.498/lb
3
22
$512.74*
General Lee-20 Electric Kiln
18.9 cu.ft
5.986 kwh/burn
$1.46/kwh
12
22
$2307.24**
*Gas units utility expense per year: 15.6lb/burn x $0.498/lb x 3 x 22 = $512.74
** Electric units utility expense per year: 5.986 kwh/burn x $1.46/kwh x 12 x 22 = $2307.24

The 12 electric units and 3 gas units are two mutually exclusive projects. The working capita loan and a line of credit approved by the bank are only sufficient in acquiring either type and the related installation and expert testing cost. Since the two projects are of the same level of productiveness, the company is going to make the choice between them. In other words, the two projects cannot be undertaken simultaneously. The approval of one will exclude the possibility of accepting the other one
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