Question

Jefferson County’s Board of Representatives is considering the purchase of a site for a new sanitary landfill. The purchase price for the site is $250,000 and preparatory work will cost $44,400. The landfill would be usable for 10 years. The board hired a consultant, who estimated that the new landfill would cost the county $40,000 per year less to operate than the county’s current landfill. The current landfill also will last 10 more years. For a landfill project, Jefferson County can borrow money from the federal government at a subsidized rate. The county’s hurdle rate is only 4 percent for this project.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

a.	Compute the net present value of the new landfill. Net present value =

Required:

a.	Calculate the landfill project’s internal rate of return to the nearest whole percent.
	Internal rate of return = %

Answer 1

Solution: Here initial cash outflow = $250,000 + 44,400 = $294,400

The following table showing computation of NPV and IRR as follows:

Present value P.V. of Cash flow (A)x(B) 1 (294,400) Cash flow (A) Factor(B) (294,400) Year 0 0.962 $ 1 40,000 38,480 0.925 $37,000 0.889 $35,560 0.855 34,200 2 40,000 3 40,000 4 40,000 0.822 $ 5 40,000 32,880 0.790 $31,600 40,000 0.760 $ 40,000 30,400 0.731 $ 29,240 40,000 0.703$ 40,000 28,120 0.676 $ 10 40,000 27,040 Net Present Value $30,120 Internal rate of return (IRR) 6% 7

IRR is computed using a formula which is " =IRR "

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