jefferson County’s Board of Representatives is considering the purchase of a sit
ID: 2533528 • Letter: J
Question
jefferson County’s Board of Representatives is considering the purchase of a site for a new sanitary landfill. The purchase price for the site is $200,000 and preparatory work will cost $45,152. The landfill would be usable for 10 years. The board hired a consultant, who estimated that the new landfill would cost the county $47,000 per year less to operate than the county’s current landfill. The current landfill also will last 10 more years. For a landfill project, Jefferson County can borrow money from the federal government at a subsidized rate. The county’s hurdle rate is only 10 percent for this project.
Compute the net present value of the new landfill.
Yes
No
No
Yes
jefferson County’s Board of Representatives is considering the purchase of a site for a new sanitary landfill. The purchase price for the site is $200,000 and preparatory work will cost $45,152. The landfill would be usable for 10 years. The board hired a consultant, who estimated that the new landfill would cost the county $47,000 per year less to operate than the county’s current landfill. The current landfill also will last 10 more years. For a landfill project, Jefferson County can borrow money from the federal government at a subsidized rate. The county’s hurdle rate is only 10 percent for this project.
Explanation / Answer
(a)Compute the net present value of the new landfill.
Net Cash Flow = $47000 for 10 Years
Investment = $200000 + $45152 = $245152
Discounting rate = 10%
Period = 10 Years
Net present value (NPV) = Present Vale of cash flows – Initial Investment
= [ $47000 x (PVAF 10%,10 Years) ] - $245152
= [ $47000 x 6.14457 ] – $245152
= $ 288795 - $245152
= $88,795
Net present value (NPV) = $88,795
(b) Should the board approve the project?
Yes. The project should be approved by the board since the Net Present Value of the project is Positive = $88,795
Calculate the landfill project’s internal rate of return to the nearest whole percent.
Present Value Factor = $ 245152 / $47000
= 5.216
From the PVA Factor Table, IRR corresponding to 5.216 for 10 years = 14%
Therefore, Internal Rate of Return = 14%
Should the board approve the project?
Yes. The Project Should be accepted, since the IRR (14%) is more than the Required rate of return (10%)
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