The chemical treatment plant currently must add chemicals to main the balance in its propertary process. two chemicals are added, Napatha and toluene. Five gallons of naptha and 7 gallons of toluene are added daily. the cost of Naptha is $4.50/ gallon and toluene is $11.75/ gallon. To keep inventory low, orders are placed weekly at a cost of $50 /week the plant runs 50 weeks/year, having a week long summer and winter shutdown.
One of the engineers has identified a filtration system that will keep the chimical balance and reduce chemical usage. the capital investment for the filteration system is $120,000 and last for 7 yrs before being completely overhauld. with the new filtration only 2 gallons of Naptha are required and 3 gallons of toluene are required daily. with the reduction of inventory, orders can be placed every other week.
Is the capital investment a good idea?
What is the change in cost with the capital investment after 7 years?