Question

A town in Wyoming wants to drill a geothermal well to provide district heating steam and hot water for its businesses and residences. After government subsidies, the capital investment for the well is $732,000, and the geothermal well will reduce natural gas consumption for steam and hot water production by $60,000 per year. The salvage value of the well is negligible. The simple payback period for this well is 13 years. If the MARR of the town is 5% per year and the life of the geothermal well is 23 years, what is the IRR for this project? Choose the closest answer below. A. The IRR for the project is 6.1% per year. B. The IRR for the project is 7% per year. O C. The IRR for the project is 7.4% per year. O D. The IRR for the project is 3.9% per year.

Answer 1

The IRR for the geothermal well project is 6.1% per year.

Step-by-step explanation:

The IRR (Internal Rate of Return) for the geothermal well project is 6.1% per year.

To calculate the IRR, we need to find the discount rate that makes the net present value (NPV) of the project equal to zero. Using the given information, we can calculate the NPV of the project at 5% discount rate for each year and find the rate at which the NPV becomes zero. By using a financial calculator or software, we find that the IRR for the project is approximately 6.1% per year.

Answer 2

The correct answer is C. The IRR for the project is 7.4% per year.

What is the IRR ?

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it is the rate at which the investment's cash inflows just cover the initial investment and the cost of capital.

To calculate the IRR for this project, we can use a financial calculator or spreadsheet software. The steps are as follows:

Enter the following cash flows into the calculator:

Year 0: -$732,000 (initial investment)

Years 1-23: $60,000 (annual savings)

Calculate the IRR. The IRR for this project is 7.4% per year.