Question

A metal plating company is considering three different methods for recovering by-product heavy metals from a manufacturing site's liquid waste. The investment costs and incomes associated with each method have been estimated. All methods have a 10-year life. The MARR is 12% per year. Using internal rate of return method, determine which method should be selected Method C A Initial cost ($) -15,000 4,000 -18,000 5,000 -25,000 6,000 Annual income (S) Salvage value (S) Life, years 1000 -500 2000 10 10 10

A metal plating company is considering three different methods for recovering by-product heavy metals from a manufacturing site’s liquid waste. The investment costs and incomes associated with each method have been estimated. All methods have a 10-year life. The MARR is 12% per year. Using internal rate of return method, determine which method should be selected

Answer 1

We know that IRR can be calculated from the formula

IRR = CF0 + CF1/(1+IRR) + CF2/(1+IRR)power 2......and so on

Where

CFo = Initial investment

CF1,CF2... are cash flows every year

IRR = internal rate of return

or IRR is the point where NPV is Zero.

Thus using Hit and Trial Method;

For Project A

Interest Rate	12.00%
Initial Investement	-15,000.00
Net Cash Flows
1	4,000.00
2	4,000.00
3	4,000.00
4	4,000.00
5	4,000.00
6	4,000.00
7	4,000.00
8	4,000.00
9	4,000.00
10	3,000.00 (4000 - salvage value)

Now using the formula,lets assume interest rate to be 21 % ,put the figures in the formula. The interest rate is to be assumed .

Thus 15000 + 4000/(1+23%) + 4000 (1+23%)to the power 2.... and so on

Calculating the same, we get that NPV is not zero .now as we take 23 %, it will show that here NPV is zero. Hence 23 % is the IRR

Similarliy for Project B and C, IRR will be as under

Project B Project C

Initial Investement	-18,000.00	Initial Investement	-25000
Net Cash Flows		Net Cash Flows
1	5,000.00	1	6,000.00
2	5,000.00	2	6,000.00
3	5,000.00	3	6,000.00
4	5,000.00	4	6,000.00
5	5,000.00	5	6,000.00
6	5,000.00	6	6,000.00
7	5,000.00	7	6,000.00
8	5,000.00	8	6,000.00
9	5,000.00	9	6,000.00
10	3,000.00	10	5,500.00

IRR 24 % IRR = 20 %

Thus method B needs to be selected