Cost Reduction Proposal: IRR, NPV, and Payback Period JB Chemical currently disc
ID: 2566609 • Letter: C
Question
Cost Reduction Proposal: IRR, NPV, and Payback Period JB Chemical currently discharges liquid waste into Calgary's municipal sewer system. However, the Calgary municipal government has informed JB that a surcharge of $4 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 700,000 liters a day. However, management anticipates that only about 200,000 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 $360,000, and annual operating costs are predicted to be $150,000. The system has a predicted useful life of twelve years and a salvage value of $50,000. (a) Determine the project's net present value at a discount rate of 22 percent. (Round to the nearest whole number.) $ Answer (b) Determine the project's approximate internal rate of return. (Round your answer to the nearest whole percentage.) Answer % (c) Determine the project's payback period. Answer years
Explanation / Answer
Discount rate 22% Initial Cost 360,000 Salvage value 50,000 Life in years 12 Liquid processed a day 200,000 liter No of days in year 300 Total processed =200000*300 60,000,000 liter 1 Cubic liter= 1,000 liter Surcharge 4 per cubic liter Total surcharge =60000000*4/1000 240,000 This surcharge will be saved So annual saving 240,000 Annual cost 150,000 Net saving 90,000 Lets plot these cash flows below Year Cash flow PV Factor Present Value Cumulative cash flow 0 (360,000) 1.000 (360,000) (360,000) 1 90,000 0.820 73,770 (270,000) 2 90,000 0.672 60,468 (180,000) 3 90,000 0.551 49,564 (90,000) 4 90,000 0.451 40,626 - 5 90,000 0.370 33,300 90,000 6 90,000 0.303 27,295 180,000 7 90,000 0.249 22,373 270,000 8 90,000 0.204 18,339 360,000 9 90,000 0.167 15,032 450,000 10 90,000 0.137 12,321 540,000 11 90,000 0.112 10,099 630,000 12 90,000 0.092 8,278 720,000 12 50,000 0.092 4,599 770,000 NPV 16,063 Net present value= 16,063 Payback period= 4 year calculation of IRR Year Cash flow PV Factor Present Value @ 22% PV Factor @ 30% Present Value @ 30% 0 (360,000) 1.000 (360,000) 1.000 (360,000) 1 90,000 0.820 73,770 0.769 69,231 2 90,000 0.672 60,468 0.592 53,254 3 90,000 0.551 49,564 0.455 40,965 4 90,000 0.451 40,626 0.350 31,512 5 90,000 0.370 33,300 0.269 24,240 6 90,000 0.303 27,295 0.207 18,646 7 90,000 0.249 22,373 0.159 14,343 8 90,000 0.204 18,339 0.123 11,033 9 90,000 0.167 15,032 0.094 8,487 10 90,000 0.137 12,321 0.073 6,528 11 90,000 0.112 10,099 0.056 5,022 12 90,000 0.092 8,278 0.043 3,863 12 50,000 0.092 4,599 0.043 2,146 NPV 16,063 NPV (70,730) IRR =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV) IRR =22%+8%*(16063/(16063+70730)) 23.48% So the IRR from the project is 23.48%