Galveston Chemical produces a variety of chemicals that are used in an array of commercial applications. One popular product, a chemical solvent, has among its required materials two very caustic acids, A and B. These acids are a very serious environmental hazard if not disposed of properly. For every ton of chemical produced, 500 pounds of acid A are required as well as 300 pounds of acid B. Because of inefficiencies in the present production process, 40 pounds of acid A and 20 pounds of acid B remain as waste with each ton of chemical manufactured. Because of impurities in the waste acids, they cannot be used in the production of future batches of product. The company incurs a cost of $2 per pound to dispose of the waste acid produced. Recently, the company has become aware of new technology that reduces the quantity of waste acids produced. This technology would generate only 1 pound of acid A and 5 pounds of acid B as waste from each ton of chemical manufactured. Corporate management has estimated the new technology could be acquired and installed at a cost of $500,000. The technology would have a life expectancy of six years. The new technology would not otherwise affect the cost of producing the chemical solvent.
a. Which environmental cost management strategy is Galveston Chemical considering in this example?
b. Why would the application of discounted cash flow methods be appropriate to evaluate the new technology?