To recycle an item, drag the item from your chest or wardrobe to the Recycler. The Recycler is an icon that looks like a green bin with arrows on it, located under the cash register icon where you sell items. Each item you recycle has a certain number of points associated with recycling it. You will be asked to confirm your item recycle with a check box. Once an item is recycled, it is gone forever. Once you build up Recycle Points you can cash them out for an Eco Prize.
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