A landfill has a first cost of $285,000. Annual operating and maintenance costs

Question

A landfill has a first cost of $285,000. Annual operating and maintenance costs for the first year will be $48,000. These costs will increase at 13% annually. Income for dumping rights at the landfill will be held fixed at $147,000 per year. The landfill will be operating for 12 years. Inflation will average 5%, and a real return of 3% is desired. What is the present worth of this project using: A then-current (actual dollar) analysis. $ Round entry to two decimal places. The tolerance is plusminus 20. A constant dollar analysis. $ Round entry to two decimal places. The tolerance is plusminus 20.

Explanation / Answer

The present worth of the project is $ 128,520.34 from both methods (actual dollar and Constant Dollar)

Inflation rate 5% Real Return 3% Market Return (inflation rate + real rate) 8% year Cash ouflow Cash inflow Net cash inflow/outflow (actual Dollars) Multiplied by Deflation Factor Cash Flows in Constant Dollars Multiplied by Discounting Factor Equivalent Present Worth (constant Dollar) 0 -285000 -285000.00 1 -285000.00 1 -285000.00 1 -48000 147000 99000.00 (1+0.05)-1 94285.71 (1+0.03)-1 91539.53 2 -54240 147000 92760.00 (1+0.05)-2 84136.05 (1+0.03)-2 79306.30 3 -61291.2 147000 85708.80 (1+0.05)-3 74038.48 (1+0.03)-3 67755.70 4 -69259.1 147000 77740.94 (1+0.05)-4 63957.67 (1+0.03)-4 56825.56 5 -78262.7 147000 68737.27 (1+0.05)-5 53857.45 (1+0.03)-5 46457.91 6 -88436.9 147000 58563.11 (1+0.05)-6 43700.70 (1+0.03)-6 36598.64 7 -99933.7 147000 47066.32 (1+0.05)-7 33449.15 (1+0.03)-7 27197.22 8 -112925 147000 34074.94 (1+0.05)-8 23063.26 (1+0.03)-8 18206.35 9 -127605 147000 19394.68 (1+0.05)-9 12501.98 (1+0.03)-9 9581.73 10 -144194 147000 2805.99 (1+0.05)-10 1722.63 (1+0.03)-10 1281.80 11 -162939 147000 -15939.23 (1+0.05)-11 -9319.34 (1+0.03)-11 -6732.49 12 -184121 147000 -37121.34 (1+0.05)-12 -20670.55 (1+0.03)-12 -14497.91 Total 128520.34 Adjusted-Discounted Method is used for actual dollar analysis where i= real rate + inflation rate + real rate * inflation rate i 8.15% year Actual Dollars Multiplied by Discounting Factor Equivalent Present Worth 0 -285000 1 -285000.00 1 99000 (1+0.0815)-1 91539.53 2 92760 (1+0.0815)-2 79306.30 3 85708.8 (1+0.0815)-3 67755.70 4 77740.94 (1+0.0815)-4 56825.56 5 68737.27 (1+0.0815)-5 46457.91 6 58563.11 (1+0.0815)-6 36598.64 7 47066.32 (1+0.0815)-7 27197.22 8 34074.94 (1+0.0815)-8 18206.35 9 19394.68 (1+0.0815)-9 9581.73 10 2805.987 (1+0.0815)-10 1281.80 11 -15939.2 (1+0.0815)-11 -6732.49 12 -37121.3 (1+0.0815)-12 -14497.91 Total 128520.34

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