Evaluate the green bin proposal financially using net present value.Assume a minimum acceptable rate of return of

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Question:

Evaluate the green bin proposal financially using net present value.Assume a minimum acceptable rate of return of 12 percent and a project life of 15 years. Clearly state any assumptions.

Financial Data

If city council approved the green bin program, the implementation process would begin with a pilot study of 750 households in the Pond Mills area starting in October 2010, with full implementation completed by the end of 2012. The city would have to purchase nine new trucks at a cost of $211,000 each, and 28 existing trucks would have to be retrofitted to empty the bins at a cost of $55,000 each. The city would also need to purchase 110,000 bin units (including the kitchen box) for London households at a cost of $30 per unit. Because program implementation would occur over three years, 60 per cent of the capital costs would be paid at the end of 2011 and 40 per cent at the end of 2012. The delay in filling the current landfill would eliminate the need to ship garbage elsewhere for three years starting in 2024, saving the city $6.2 million annually until 2027. There would also be some savings resulting from reduced use of the landfill site.

Annual expenses of the program included wages and benefits for collection staff, maintenance of the vehicles, fuel and compost processing costs. After the pilot study was completed, the program would be rolled out to 50 per cent of households in the city by October 2011 and then to 100 per cent of households by October 1, 2012. Refer to Exhibit 3 for expected annual expenses and savings.

As part of its future environmental strategy, the Province of Ontario was considering an initiative called "Extended Producer Responsibility" , which shifted the costs of waste management away from the municipalities towards the producers and retailers of the products that originally generated the waste. The city estimated that Extended Producer Responsibility legislation could provide revenues of as high as $800,000 annually through transfer payments from the Province. These transfers would be contingent on the city reaching the 60 per cent diversion goal set by the Province. Implementation of Extended Producer Responsibility was not expected until at least 2015.