Question

RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $65,000 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 $9,000. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $13,000 per year. If the new system is purchased, cost savings of $25,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making. Show the internal rate of return used to reach your decision:

Answer 1

The project return is lower than the minimum accepted of 15% thus not profitable for the company

Net Present Value -1.279,86‬

Step-by-step explanation:

Loan Present value

PMT of the loan:

`PV / (1-(1+r)^(-time) )/(rate) = C\\`

PV 65,000

time 4

rate 0.12

`65000 / (1-(1+0.12)^(-4) )/(0.12) = C\\`

C $ 21,400.238

Present value at MARR:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C $21,400.24

time 4 years

rate 0.15

`21400.2383598698 * (1-(1+0.15)^(-4) )/(0.15) = PV\\`

PV $61,097.2175

Salvage value:

`(Salvage )/((1 + rate)^(time) ) = PV`

Salvage $9,000

time 9 years

rate 0.15000

`(9000)/((1 + 0.15)^(9) ) = PV`

PV 2,558.36

Cost savings present value:

Cost savings per year: 25,000

less maintenance expenses (13,000)

net cash flow 12,000

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C $ 12,000

time 9 years

rate 0.15

`12000 * (1-(1+0.15)^(-9) )/(0.15) = PV\\`

PV $57,259.0070

Net Present Value

PV cost savings + PV salvage - PV loan payment

57,259 + 2,558.36 - 61,097.22 = -1.279,86‬