Agdist Corporation distributes agricultural equipment. The board of directors is
ID: 2792367 • 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 $12million in assets and would produce an annual after-tax net benefit of $1.8 million over a service life of seven 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 $1.1 million. Compute the rate of return of this project.Is this a good project at MARR equals=14%?
Explanation / Answer
IRR or rate of return is the rate at which NPV=0
NPV=-12+1.8/(1+r)+1.8/(1+r)^2........1.8/(1+r)^7+1.1/(1+r)^7
Hence, at IRR,
0=-12+1.8/(1+r)+1.8/(1+r)^2........1.8/(1+r)^7+1.1/(1+r)^7
0=-12+1.8/r*(1-1/(1+r)^7)+1.1/(1+r)^7
Hence, r=3.226131628962%
No, this is not a good project as its IRR is less than MARR of 14%