What is the annual cost of the landfill cleanup, including amounts to retire the bond issue?
The second part of the case, The Old Brownsville Road Landfill, talks about the cleanup costs related to the Brownsville site. In order to fund the one-time cleanup costs of $35,778,500 (please see question 1 for details), the city has to issue a bond. The bonds carry an annual interest rate of 8 percent and the entire principal is due in 20 years. To lower the risk of the bondholder and to ensure that the city has enough funds to payoff the bond in 20 years, the city must set up a sinking fund in a separate custodial account. The accumulated amount or periodic contributions regularly made by the city for 20 years should equal the principal amount of …show more content…
For operations, there are two items pertaining to cash inflow or revenues: residential and business. We multiplied the number of households (29,270) the city currently serves by the monthly rate of $12 to obtain the monthly revenue. Since the problem asks for annual cash flows, we multiplied the monthly revenue by 12 months and got the annual revenue of $4,214,880. We did the same procedure to the 2,150 businesses to which the city charges $28 per month for trash services. On the other hand, the cash outflows related to trash collection and landfill operations are the operating expenses of $4,810,000 and annual clay cap maintenance of $240,000. To determine the net cash flow, we subtracted inflows from outflows and obtained the amount of -$112,720. While cash flows related to bonds include the inflow pertaining to the 5 percent return on sinking fund ($706,890.59) and cash paid to investment on sinking fund ($1,082,034.41) and bond interest ($2,862,280). After subtracting the cash inflow from cash outflow, we obtained a net cash flow of -$3,237,423.81 related to bonds. In summary, we can assume that the city is paying more costs than what it is earning. Hence, the city should make additional efforts to increase its revenue to keep its fund