Question

Question 1 RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $25,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year. It is anticipated that the sprinkler system would be used for 9 years and then sold for a salvage value or nsoo. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be s8,500 per year. If the new system is purchased, cost savings of $15,000 per year will be realized over the present manual watering system. Rearrf uses a MARR of 15% year for economic decision making. Show the internal rate of return used to reach your decision: Based on an internal rate of return analysis, is the purchase of the new sprinkler system economically attractive?

Answer 1

Annual payment for loan; PMT(0.12,4,-25000,0) 8230.86 Recommendation: Slnce IRR > MARR, project should be accepted. Year Loan payment O&M cost Savings Salvage value Total cash flow IRR -8230.86 -8230.86 -8230.86 -8230.86 -8500 8500 500015000 8500 8500 8500 8500 15000 15000 15000 -8500 15000 15000 -1730.86- 1730.86 -1730.86 6500 6500 6500 6500 8000 4 43.08%