Refer to the table below when you need to. Please show all your work! The DNR ch

Question

Refer to the table below when you need to.

Please show all your work!

The DNR charges a fee on for Sulfur Dioxide (SO2) emitted into the air. The "Big Shoe" sneaker company currently pays this fee for 2,000 tons of (SO2) each year. A new technology is available, that would cut the (SO2) emissions in half. It would cost the company $200,000 to install the technology NPV What is the (NPV) Net Present Value of this investment, assuming a 10% c of capital and a 30 year time frame. technology? Is it in the best interests of the company to purchase the What is the maximum amount that the company would spend on this technology? What is the "payback time" for this investment? B. C. What is the IRR (Internal Rate of Return) for this investment [hint: at what "r" is the NPV equal to zero]?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

1)

Annual Savings = 50*2000*1/2 = 50000

NPV = -200000 + 50000*PVIFA(30,10%) = -200000 + 50000*9.43 = $271500

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2) Yes, it is worthwhile to purchase the technology as it offers a + NPV.

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3) The Maximum amount the company should be willing to pay for the technology would be equal to the NPV, that is, $271500

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Part B:

Payback Period = Initial Cost/Annual Savings = 200000/50000 = 4 Years

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Part C:

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -200000 + 50000*PVIFA(30,r) where r indicates IRR

Solving for r with the use of Table/Excel, we ger IRR as 24.97%

IRR = 24.97%.

Thanks.

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