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bija089 [108]
3 years ago
12

RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $50,000 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 $5,000. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $10,500 per year. If the new system is purchased, cost savings of $20,500 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making.What is the internal rate of return used to reach your decision?
Business
1 answer:
Jet001 [13]3 years ago
8 0

Answer:

savings per year = $20,500 - $10,500 = $10,000

the loan and interest are not included in the calculation

initial outlay = $50,000

cash flows 1-8 = $10,000

cash flow 9 = $15,000

discount rate = 15%

using a financial calculator, the NPV = -$862.85, and the IRR = 14.53%

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With short sales, the price is usually upward trending so will normally increase from the last price. As the last price here was $34.15, that would be the likely minimum for the next sale.

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