Question

RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $65,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year. It is anticipated that the sprinkler system would be used for 9 years and then sold for a salvage value of $9,000. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $13,000 per year. If the new system is purchased, cost savings of $25,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making. Show the internal rate of return used to reach your decision:

Answer 1

Answer:

The project return is lower than the minimum accepted of 15% thus not profitable for the company

Net Present Value -1.279,86‬

Explanation:

Loan Present value

PMT of the loan:

$PV \div \frac{1-(1+r)^{-time} }{rate} = C$

PV 65,000

time   4

rate 0.12

$65000 \div \frac{1-(1+0.12)^{-4} }{0.12} = C$

C  $ 21,400.238

Present value at MARR:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C $21,400.24

time 4 years

rate 0.15

$21400.2383598698 \times \frac{1-(1+0.15)^{-4} }{0.15} = PV$

PV $61,097.2175

Salvage value:

$\frac{Salvage }{(1 + rate)^{time} } = PV$  

Salvage $9,000

time  9 years

rate  0.15000

$\frac{9000}{(1 + 0.15)^{9} } = PV$  

PV   2,558.36

Cost savings present value:

Cost savings per year:           25,000

less maintenance expenses (13,000)

net cash flow                          12,000

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C $ 12,000

time 9 years

rate 0.15

$12000 \times \frac{1-(1+0.15)^{-9} }{0.15} = PV$

PV $57,259.0070

Net Present Value

PV cost savings + PV salvage - PV loan payment

57,259 + 2,558.36 - 61,097.22 = -1.279,86‬