A new woter treatment operotion is beina considesedt for the new autonated woter

Question

A new woter treatment operotion is beina considesedt for the new autonated woter treotment plant in South Africa. The system can be purchased and instolled for $ million and requires additional annual operating and maintanence expenses f $2.7 million over a 2er period. Howeuer, it uwill save an estimated 52 million each yeor from Hhe reduced operational, enironmantal, and security ists. The company of 12 percent per year in 12 percent per year in its eConomic evolua tions of the new system. Thermarket valueof the system will be?4.45million ot the end of 22 years. Write he corret equation to colculate the lea and explain how we can determine if this sustem should be installed using this 120 valve.

Explanation / Answer

Thumb of rule for IRR

If IRR > MARR, then accept the project

Since IRR < MARR in this case, the project should not be accepted.

Year Cashflow DCF @ 12% PV DCF @ 4% DCF @ 4.27% 0 -44.5 1 -      44.50 1 -      44.50 1 -      44.50 1-21 3 7.562         22.69 14.029         42.09 13.687         41.06 22 7.45 0.083           0.62 0.422           3.14 0.399           2.97 -34.05 -      21.20           0.73 -        0.47 Since NPV is negative at to calculate IRR, we will discount the cashflows at different rates till we get a positive value By trial and error, the NPV is positive at 4% To arrive at IRR, we use the following equation IRR = Rate of Higher NPV + (Higher NPV*(higher rate - lower rate) /(Higher NPV-Lower NPV) = 4 + ((0.73 * (12-4))/(0.73-(-21.23)) =           4.27

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