RealTurf is considering purchasing an automatic sprinkler system for its sod far
ID: 2461071 • Letter: R
Question
RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $35,000 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 $1,500. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $8,500 per year. If the new system is purchased, cost savings of $15,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making.
Based on an internal rate of return analysis, is the purchase of the new sprinkler system justified? Show the internal rate of return used to reach your decision
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Explanation / Answer
Loan Repayment Schedule Outstanding Interest Installement Balance Intt + Inst 35000 4200 8750 26250 12950 26250 3150 8750 17500 11900 17500 2100 8750 8750 10850 8750 1050 8750 0 9800 Assumed rate IRR year Intt + Inst Annual Expense Saving Annual Salvage Net Pvf 1.15 1.1 1.125 1 -12950 -8500 15000 -6450 0.870 -5608.7 0.909 -5863.64 0.889 -5733.33 2 -11900 -8500 15000 -5400 0.756 -4083.18 0.826 -4462.81 0.790 -4266.67 3 -10850 -8500 15000 -4350 0.658 -2860.2 0.751 -3268.22 0.702 -3055.14 4 -9800 -8500 15000 -3300 0.572 -1886.79 0.683 -2253.94 0.624 -2060.17 5 -8500 15000 6500 0.497 3231.649 0.621 4035.989 0.555 3607.038 6 -8500 15000 6500 0.432 2810.129 0.564 3669.081 0.493 3206.256 7 -8500 15000 6500 0.376 2443.591 0.513 3335.528 0.438 2850.006 8 -8500 15000 6500 0.327 2124.862 0.467 3032.298 0.390 2533.338 9 -8500 15000 1500 8000 0.284 2274.099 0.424 3392.781 0.346 2771.515 NPV -1554.52 1617.066 -147.164 hence IRR lies between 10 and 15 interpolating 1617.066 3171.589 2.549299 IRR 12.54 https://file.io/4fcSMa
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