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2. A chemical company is considering options for eliminating harmless chemical sludge
from the following 2 options.
(1) Prepare the site for landfilling in the factory. This option requires the initial
investment for purchasing the essential equipment 130,000 Baht. Each year there will
also be a cost of landfill operation 95,000 baht per year. At the end of its service life of
3 years, the equipment used within the landfill site will have a salvage value of 20,000
baht.
(2) Hire a chemical sludge removal contractor to remove sludge. The contract
term must be 6 years. The cost of contract to be paid to the contractor are 110,000
Baht a year in year 1-2; 115,000 Baht in year 3; 120,000 Baht in year 4; 125,000 Baht in
year 5; and 130,000 Baht in year 6.
a) (13 marks) If the company finances the money for this project by borrowing from a
bank in which the bank charges interest on loans at the rate of 3.86% per 6 months,
compounded every month. Which option should this chemical company choose?
b) (5 marks) The company executives believe that the option of establishing a landfilling
site within the factory seems to be a more sustainable alternative for the company. If
the selection in question a) above did not select the landfilling site option, please
suggest how much the initial investment for purchasing the equipment should cost so
that the landfill option would be selected (assume the same salvage value of the
equipment)?
