Question

E17.26 Environmental and social costing for decisions: orchard LO 17.8 9, 17.12 Renmark Orchards and Cannery is considering buying high pressure cleaning equipment that vacuums waste liquids into a storage tank and then purifies the waste. The wastewater can then be pumped back onto orchards. The system will avoid any leakage of liquid waste into the Murray River, which has happened once every two years, and will avoid the related workers' compensation claims that have arisen every five years. The operating characteristics are as follows: Initial outlay for new equipment, 10-year life, no residual value $978 690 Annual operating cost over 10-year life $ 31 808 p.a. Depreciation 10% p.a. Savings in water cost due to reclaimed water $ 31 974 p.a. Total cost of cleaning and maintaining the system every 4 years $ 29 800 Workers' compensation claims $ 11 000 Required: 1. Prepare a summary of the total costs for the waste cleaning system for the next 10 years. 2. Should Renmark Orchards invest in this equipment even if it is uneconomic?

Answer 1

Answer 1: Initial layout for new Equipment for 10 year =$978 690 Annual operating cost for 10 year=$31 808 x 10=$318 080 Depreciation of 10% for 10 year on asset=$341 245 (straight line method calculation) Depreciation Schedule Period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Beginning Depreciation Balance Value $978,690 $97,869 $880,821 $880,821 $88,082 $792,739 $792,739 $79,274 $713,465 $713,465 $71,347 $642, 119 $642, 119 $64,212 $577,907 $577,907 $57,791 $520, 116 $520,116 $52,012 $468,104 $468,104 $46,810 $421, 294 $421,294 $42,129 $379,165 $379,165 $37,916 $341,248 Cost of layout after Depreciation=$(978 690-341 245)=$ 637 445

Saving in water cost=$31 974 x 10= $319 740 Total cost of cleaning and mainting after in a timeperiod of 10 year= $29 800x 2=$59 600 Compensation claimed in 10 year=$11 000 x2=$22 000 which will be overcomed so omit from calculation. Total cost for next 10 year =Fixed cost + Variable Cost (Although for larger time period nothing is variable but simplicity we are using it as variable cost) = $( 637 445+318 080+59 600 =$ 1,015,125 Answer 2: Yes, investment shoul be done even though there is a loss it save the environment by avoiding any leakage of liquid waste in to Marray river also the related compensation can be overcomed along with saving.