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
Total cost = 600 x 450 + 175000 =$445000 Returns = NPV = 40000(1/1.08^20 + 1/1.08^19 +........+1/1.08) = $392725.8963 $392725.8963 < $445000 So it should not be acquired b) irr 445000/40000 = 1/(1+r)^20 + 1/(1+r)^19 +........+1/(1+r) r =6.379 %