How does Washington Township analyze its potential equipment purchases?

Washington Township in Franklin County, Pennsylvania, operates a Transfer Station and Recycle Center that individuals and businesses can use to recycle a variety of items, including electronics, bottles, and cardboard. At the township’s Transfer Station and Recycle Center, a baler is used to compress and bale certain recyclable items for transport.  Typically, balers might produce a 20 to 1 compaction rate, meaning that the space to transport the recyclables is reduced to 1/20^th of what the materials would be required if not compacted. For example, milk jugs recycled at the center can be compressed into a compact 5’ cube; if not compacted, those same milk jugs would take up the equivalent space of 20 cubes.

In 2012, the township spent $27,000 on repairs to its baler.  At that time, supervisors at the township’s Transfer Station and Recycle Center expected the amount of repairs to continue to increase, given the baler’s age (18 years old.)

The township purchased two pieces of equipment in 2013 for use in its Transfer Station and Recycle Center.  It replaced the old baler with a new one costing $103,920.  It also purchased an infeed belt system for $58,745, which allows for increased efficiency and automation in processing its recyclables. An infeed belt system uses a conveyor belt to move recyclables into a shredder or baler, reducing the amount of human labor needed. (Examples of infeed belt systems can be found here.)

Source: News article from The Herald-Mail can be accessed here.

Questions

1)      What capital budgeting tools could the township have used to analyze these investment possibilities?

2)      In 2013, when the township was making the decision to keep or replace the original baler, what type of cost was the $27,000 that the township spent in 2012 on baler repairs?

3)      Suppose that the maintenance cost on the old baler was projected to rise by 5% per year beginning in 2013.  What is the payback period on the new baler?  (Assume that the new baler was purchased at the beginning of 2013 and requires annual maintenance costing $5,000.)

4)      Calculate the net present value (NPV) of the new baler, given the following assumptions:

1. The new baler has an estimated life of 15 years
2. The original baler has a salvage value of $3,000
3. The original baler’s maintenance costs will increase by 5% per year beginning in 2013
4. The township uses a discount rate of 6%

5)      How do you think the township could have justified (i.e., made a business case for) the purchase of the infeed belt system? 6)      What qualitative factors might the township have considered in making the decision to purchase the new recycling equipment?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. †Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions. †The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf)†(contains entire blog posting + discussion questions)
• PowerPoint file†(brief article overview + discussion questions)
• YouTube video (narrated article in shareable YouTube link – COMING SOON)

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