Please use a sensitivity analysis to solve
this! thanks!
Homework Answers
Let’s calculate internal rate of return (IRR) assuming different cost of new pump range from $30,000 to $50,000. Acceptable IRR is above 12%
Annual Saving in operating cost = Annual Operating cost of old Pump - Annual Operating cost of new Pump
= $40,000 - $20,000
= $20,000
| Saving in operating cost | IRR | |||
| Cost of new Pump | Year 1 | Year 2 | Year 3 | |
| -$30,000 | $20,000 | $20,000 | $20,000 | 44.63% |
| -$31,000 | $20,000 | $20,000 | $20,000 | 41.97% |
| -$32,000 | $20,000 | $20,000 | $20,000 | 39.45% |
| -$33,000 | $20,000 | $20,000 | $20,000 | 37.08% |
| -$34,000 | $20,000 | $20,000 | $20,000 | 34.82% |
| -$35,000 | $20,000 | $20,000 | $20,000 | 32.68% |
| -$36,000 | $20,000 | $20,000 | $20,000 | 30.64% |
| -$37,000 | $20,000 | $20,000 | $20,000 | 28.69% |
| -$38,000 | $20,000 | $20,000 | $20,000 | 26.84% |
| -$39,000 | $20,000 | $20,000 | $20,000 | 25.07% |
| -$40,000 | $20,000 | $20,000 | $20,000 | 23.38% |
| -$41,000 | $20,000 | $20,000 | $20,000 | 21.75% |
| -$42,000 | $20,000 | $20,000 | $20,000 | 20.20% |
| -$43,000 | $20,000 | $20,000 | $20,000 | 18.70% |
| -$44,000 | $20,000 | $20,000 | $20,000 | 17.27% |
| -$45,000 | $20,000 | $20,000 | $20,000 | 15.89% |
| -$46,000 | $20,000 | $20,000 | $20,000 | 14.56% |
| -$47,000 | $20,000 | $20,000 | $20,000 | 13.28% |
| -$48,000 | $20,000 | $20,000 | $20,000 | 12.04% |
| -$49,000 | $20,000 | $20,000 | $20,000 | 10.85% |
| -$50,000 | $20,000 | $20,000 | $20,000 | 9.70% |
We can see from above table that if the cost of new pump is low ($30,000) then the IRR is highest and it is decreasing with increasing cost of new pump. Therefore replacement of old pump is sensitive to the cost of new pump. The price of new pump is acceptable up to $48,000 as IRR is above 12%.
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Please use a sensitivity analysis to solve
this! thanks!
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