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scourse.com/platform/mod/quiz/attempt.php?attempt- 1811768 Menu QUESTION 1 Not complete Points out of 20.00 P Flag question Cost Reduction Proposal: IRR, NPV, and Payback Period PA Chemical currently discharges liquid waste into Pittsburgh's municipal sewer system. However, the Pittsburgh municipal government has informed PA that a surcharge of $5 per thousand cubic liters will soon be imposed for the discharge of this waste. This has prompted management to evaluate the desirability of treating its own liquid waste. A proposed system consists of three elements. The first is a retention basin, which would permit unusual discharges to be held and treated before entering the downstream system. The second is a continuous self-cleaning rotary filter required where solids are removed. The third is an automated neutralization process required where materials are added to control the alkalinity-acidity range. The system is designed to process 600,000 liters a day. However, management anticipates that only about 250,000 liters of liquid waste would be processed in a normal workday. The company operates 300 days per year. The initial investment in the system would be $900.000, and annual operating costs are predicted to be $162.000. The system has a predicted useful life of ten years and a salvage value of $70,000. (a) Determine the project's net present value at a discount rate of 16 percent. (Round to the nearest whole number.) s 0 (b) Determine the project's approximate internal rate of return. 0 (c) Determine the project's payback period. (Round answer to two decimal places.) years CheckExplanation / Answer
Computation of annual cash flow:
Daily liquid processing in ltrs
250,000
X Working days in a year
300
Yearly liquid processing in ltrs
75,000,000
Discharging cost per 1,000 ltr
$ 5
*Annual Discharging cost
$ 375,000
Less: Annual operating cost
$ 162,000
Annual cost savings
$ 213,000
*Annual Discharging cost = 75,000,000/1,000 x $ 5 = $ 375,000
10th year cash flow = Annual cost savings + Salvage value = $ 213,000 + $ 70,000 = $ 283,000
(a)
Computation of NPV:
Year
Cash Flow (C)
PV Factor Calculation
PV Factor @ 16 % (F)
PV (= C x F)
0
$ (900,000)
1/(1 + 0.016)^0
1
$ (900,000)
1
$ 213,000
1/(1 + 0.016)^1
0.862068966
$ 183,621
2
$ 213,000
1/(1 + 0.016)^2
0.743162901
$ 158,294
3
$ 213,000
1/(1 + 0.016)^3
0.640657674
$ 136,460
4
$ 213,000
1/(1 + 0.016)^4
0.552291098
$ 117,638
5
$ 213,000
1/(1 + 0.016)^5
0.476113015
$ 101,412
6
$ 213,000
1/(1 + 0.016)^6
0.410442255
$ 87,424
7
$ 213,000
1/(1 + 0.016)^7
0.35382953
$ 75,366
8
$ 213,000
1/(1 + 0.016)^8
0.305025457
$ 64,970
9
$ 213,000
1/(1 + 0.016)^9
0.26295298
$ 56,009
10
$ 283,000
1/(1 + 0.016)^10
0.226683603
$ 64,151
NPV
$ 145,345
NPV is $ 145,345.
(b)
Computation of IRR:
Year
Cash Flow
0
$ (900,000)
1
$ 213,000
2
$ 213,000
3
$ 213,000
4
$ 213,000
5
$ 213,000
6
$ 213,000
7
$ 213,000
8
$ 213,000
9
$ 213,000
10
$ 283,000
IRR
20.14%
IRR is 20.14 %
(c)
Computation of Payback period:
Year
Cash Flow
'Cum Cash Flow
0
$ (900,000)
$ (900,000)
1
$ 213,000
$ (687,000)
2
$ 213,000
$ (474,000)
3
$ 213,000
$ (261,000)
4
$ 213,000
$ (48,000)
5
$ 213,000
$ 165,000
6
$ 213,000
$ 378,000
7
$ 213,000
$ 591,000
8
$ 213,000
$ 804,000
9
$ 213,000
$ 1,017,000
10
$ 283,000
$ 1,300,000
Payback Period = A +B/C
Where,
A= Last period with a negative cumulative cash flow = 4
B = Absolute value of a cumulative cash flow at the end of the period A = $ 48,000
C = Total cash flow during the period after A = $ 213,000
Payback Period = 4 +?$ (48,000)?/ $ 213,000
= 4 + $ 48,000/ $ 213,000
= 4 + 0.225352 = 4.23 years
Payback period is 4.23 years.
Daily liquid processing in ltrs
250,000
X Working days in a year
300
Yearly liquid processing in ltrs
75,000,000
Discharging cost per 1,000 ltr
$ 5
*Annual Discharging cost
$ 375,000
Less: Annual operating cost
$ 162,000
Annual cost savings
$ 213,000