Agdist Corporation distributes agricultural equipment. The board of directors is
ID: 1175342 • Letter: A
Question
Agdist Corporation distributes agricultural equipment. The board of directors is considering a proposal to establish a facility to manufacture an electronically controlled "intelligent" crop sprayer invented by a professor at a local university. This crop sprayer project would require an investment of $8 million in assets and would produce an annual after-tax net benefit of $2.5 million over a service life of nine years. All costs and benefits are included in these figures. When the project terminates, the net proceeds from the sale of the assets will be $1 million. Compute the rate of return of this project. Is this a good project at MARR-10%? The rate of return of this project is l )%. (Round to one decimal place.)Explanation / Answer
Rate of Return or IRR of the Project = 28.3%
IRR or Rate of Return of the project is the rate where NPV = 0
IRR is obtained by trial error…We have to fix different rates to get NPV = 0.
Rate of Return = 28.3%
Discount rate = R =
28.3%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$8,000,000.00
1.000000
-$8,000,000.00
1
$2,500,000.00
0.779361
$1,948,401.49
2
$2,500,000.00
0.607403
$1,518,507.35
3
$2,500,000.00
0.473386
$1,183,464.80
4
$2,500,000.00
0.368938
$922,345.83
5
$2,500,000.00
0.287536
$718,840.00
6
$2,500,000.00
0.224094
$560,235.57
7
$2,500,000.00
0.174650
$436,625.53
8
$2,500,000.00
0.136115
$340,288.73
9
$3,500,000.00
0.106083
$371,290.68
Total of PV = NPV =
$0.00
Cash flow in year 9 includes net proceeds from sales of assets
Discount rate = R =
28.3%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$8,000,000.00
1.000000
-$8,000,000.00
1
$2,500,000.00
0.779361
$1,948,401.49
2
$2,500,000.00
0.607403
$1,518,507.35
3
$2,500,000.00
0.473386
$1,183,464.80
4
$2,500,000.00
0.368938
$922,345.83
5
$2,500,000.00
0.287536
$718,840.00
6
$2,500,000.00
0.224094
$560,235.57
7
$2,500,000.00
0.174650
$436,625.53
8
$2,500,000.00
0.136115
$340,288.73
9
$3,500,000.00
0.106083
$371,290.68
Total of PV = NPV =
$0.00