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 $200,000 and preparatory work will cost $45,152. The landfill would be usable for 10 years. The board hired a consultant, who estimated that the new landfill would cost the county $47,000 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 10 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.

      

b.	Should the board approve the project?
	Yes No Required: a. Calculate the landfill project’s internal rate of return to the nearest whole percent.        b. Should the board approve the project? No Yes

Answer 1

(a)Compute the net present value of the new landfill.

Net Cash Flow = $47000 for 10 Years

Investment = $200000 + $45152 = $245152

Discounting rate = 10%

Period = 10 Years

Net present value (NPV) = Present Vale of cash flows – Initial Investment

= [ $47000 x (PVAF 10%,10 Years) ] - $245152

= [ $47000 x 6.14457 ] – $245152

= $ 288795 - $245152

= $88,795

Net present value (NPV) = $88,795

(b) Should the board approve the project?

Yes. The project should be approved by the board since the Net Present Value of the project is Positive = $88,795

Calculate the landfill project’s internal rate of return to the nearest whole percent.

Present Value Factor     = $ 245152 / $47000

                                      = 5.216

From the PVA Factor Table, IRR corresponding to 5.216 for 10 years = 14%

Therefore, Internal Rate of Return = 14%

Should the board approve the project?

Yes. The Project Should be accepted, since the IRR (14%) is more than the Required rate of return (10%)