Problem 5-34 (algorithmic) Question Help * The world\'s largest carpet maker has
ID: 2538188 • Letter: P
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Problem 5-34 (algorithmic) Question Help * The world's largest carpet maker has just completed a feasibility study of what to do with the 16,000 tons of overruns, rejects, and remnants it produces every year. The company's CEO launched the feasibility study by asking, why pay someone to dig coal out of the ground and then pay someone else to put our waste into a landfil? Why not just burn our own waste? The company is proposing to build a $9-million power plant to bun its waste as fuel, thereby saving $2.5 million a year in coal purchases. Company engineers have determined that the waste-burning plant will be $5.5 million. y sound, and after its three-year study period the plant can be sold to a local electric utility for The IRR is% (Round to one dermal place.)Explanation / Answer
Solution: IRR = 16.8% Working Notes: IRR is the rate at which NPV is zero For that we find the one rate at which NPV is negative and another rate at which NPV is positive In our cash NPV is negative at @18% and positive at @16% Initial investment = $9 million Annual saving = $2.5 million salvage value = $5.5 million Project period = 3 years Year Cash Flow PVF @ 16% Present value @16% PVF @ 18% Present value @18% 0 -9,000,000 1 -9,000,000.00 1 -9,000,000.00 1 2,500,000 0.86207 2,155,172.41 0.84746 2,118,644.07 2 2,500,000 0.74316 1,857,907.25 0.71818 1,795,461.07 3 2,500,000 0.64066 1,601,644.18 0.60863 1,521,577.18 3 5,500,000 0.64066 3,523,617.20 0.60863 3,347,469.80 Total NPV 138,341.06 NPV -216,847.88 Here Low rate =16% High rate =18% NPV at low rate @16% = 138,341.06 NPV at high rate @18% = -216,847.88 Since the above cash flow is unequal the IRR will be calculated by IRR = low rate +( NPV at low rate / (NPV at low rate - NPV at high rate)) x (Difference in rates) IRR = 16% +( 138341.06 / (138341.06 -(-216847.88))) x (18%-16%) IRR=0.1678 IRR = 16.78% IRR=16.8 % PVF @ r% for nth period is calculated by = 1/(1+i)^n Please feel free to ask if anything about above solution in comment section of the question.
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