The Whirlpool distillery is considering a redevelopment of their waste water treatment facilities. The distillery generates large amounts of waste water containing high levels of organic materials that make it unsuitable for discharge into local waterways without treatment. Currently the distillery uses an anaerobic filtering system through a series of lagoons to process waste water. The distillery is considering updating this to an aerobic system that requires new equipment to aerate the water in the lagoons. The aerobic process is more efficient enabling the waste water to be used for irrigating the distillery's own crops, with the potential to sell any remaining water to surrounding farmers with irrigated pastures. The local water utility will provide a grant of 18 per cent of the total project cost. The required rate of return on the project is 8 per cent. Project details are given below.

Required:
a Calculate the total initial investment and the net annual savings from installing the new aerobic system.
b Calculate the payback period of the new aerobic system.
c If the new plant and equipment is expected to last five years before needing a major overhaul, calculate the NPV of the project.
d Explain what other factors should be taken into account when deciding whether or not the project should proceed, and why?
e Explain if the project should proceed given the payback period, NPV and other considerations.

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Cost of plant and equipment Engineering consultant fees Water authority grant received Reduced waste water disposal costs per year Reduced water purchasing costs per year Sales of treated water per year Additional operating costs for new system per year $150 000 6 250 31 250 37 500 12 500 6 250 2500