The White Bear Group (WBG) is thinking of building a plant. The plant will be used to process and ultimately dispose of the chemical residue from its production of fertiliser.

i.         The cost of building the plant is estimated at $1,000,000 and is expected to save the cost of using the third party disposal facility of $220,000 per year. The building is estimated to have a useful life of 10 years, and it will have 100,000 disposal value. The required rate of return is 12%.

[TASK 1] Compute the net present value and payback period for this investment. (Present value is provided in the appendix, at the end of this exam paper)

[TASK 2] Based on your answers in TASK 1, should WBG build the plant? What is your recommendation to WBG?


ii.         There is a debate in the senior management team of WBG on this proposal, where several senior managers oppose the idea of building the plant. Their main argument is that the plant will emit a mixture of tiny particles and gases to the air, which could pollute the air quality of the surrounding area. Additional investment might be needed to control the level of emission and prevent WBG from any legal actions from the authority.

[TASK 3] What would be your response to this issue? In light of the point raised by the opposing senior managers, evaluate your recommendation in TASK 2.