3. Straightforward net present value and internal rate of return The City of Bed

Question

3. Straightforward net present value and internal rate of return
The City of Bedford is studying a 600-acre site on Route 356 for a new landfill. The startup cost has been calculated as follows:
Purchase cost: $450 per acre
Site preparation: $175,000

The site can be used for 20 years before it reaches capacity. Bedford, which shares a facility in Bath Township with other municipalities, estimates that the new location will save $40,000 in annual operating costs.
a.   Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the net-present-value method to determine your answer.

Explanation / Answer

Using NPV method : (figures in bracket are in minus)

Bedford desires an 8% return on its investment, hence 8% shall be taken for discounting.  

As the NPV is minus figure,( i.e - 52,280 ), Bedford should not acquire the landfill.  

Year Name of cash flow Amount ($) Discounting factor at 8% Discounted Cash Flow ($) a 0 Purchase cost (450x600) (270,000) 1.000 (270,000) b 0 Site preparation Expenses (175,000) 1.000 (175,000) c Total cash outflow (445,000) d 1-20 Saving in annual operating costs for facilities for 20 years 40,000 PVIFA8%,20y = 9.818 392,720 e Net Present Value (i.e PV of saving amount less PV of cash outflows) (52,280)

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