Question

Wollongong City is considering the construction of a new waste treatment plant. Land acquisition will
cost $120,000. The construction works required for the plant will cost $600,000. Environmental
inspection and other expenses will cost $60,000. The plant will be built in Year 0 and will become fully
operational in Year 1 for six years (i.e. until Year 6). The annual operating cost for the plant is estimated
to be fixed at $120,000 during its anticipated 6-year service life. This waste treatment plant is expected
to reduce $12 in the average annual waste treatment fee for each of the 35,000 households that it will
serve. The reduction in the annual waste treatment fee and the number of households in Wollongong
City are both assumed to be fixed for the 6 years. Changes in the environmental conditions (air
pollution and contamination to surrounding lands) must be reflected at the cost of $150,000 at the end
of the service life of the plant.

Determine the Internal Rate of Return (IRR) of the project, given that the IRR is between
25% and 30%.

Answer 1

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