The City of Bedford is studying a 600-acre site on Route 356 for a new landfill.

Question

The City of Bedford is studying a 600-acre site on Route 356 for a new landfill. The startup cost has been calculated as follows: Purchase cost: $450 per acre Site preparation: $175,000 The site can be used for 20 years before it reaches capacity. Bedford, which shares a facility in Bath Township with other municipalities, estimates that the new location will save $40,000 in annual operating costs. a.Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the net-present-value method to determine your answer. b.Compute the internal rate of return on this project.

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Cost = 600*450 + 175000 = 445000

Annual Savings = 40000

Part A:

NPV = -445000 + 40000/(1+.08)^1 + 40000/(1+.08)^2 + 40000/(1+.08)^3 + 40000/(1+.08)^4 + 40000/(1+.08)^5 + 40000/(1+.08)^6 + 40000/(1+.08)^7 + 40000/(1+.08)^8 + 40000/(1+.08)^9 + 40000/(1+.08)^10 + 40000/(1+.08)^11

+ 40000/(1+.08)^12 + 40000/(1+.08)^13 + 40000/(1+.08)^14 + 40000/(1+.08)^15 + 40000/(1+.08)^16 + 40000/(1+.08)^17 + 40000/(1+.08)^18 + 40000/(1+.08)^19 + 40000/(1+.08)^20 = -52274

No, the land should not be acquired as it results in a Negative NPV.

Part B:

IRR (With the use of Excel) = 6.38% or 6%

Thanks.

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