The Newport Beach Sanitary Agency is presently shipping its waste to another mun

Question

The Newport Beach Sanitary Agency is presently shipping its waste to another municipality at an annual cost of $100,000. It is considering building a landfill near the city. Start-up costs for the landfill are $900,000, and there are closing costs of $500,000 that will be incurred 20 years after the landfill opens. In addition, annual operating costs are $25,000. The quarterly effective MARR is 2%.

a) Show how to calculate the present value of this project.

b) Explain why the IRR may not be well defined and show how to calculate the

external rate of return for this project.

Explanation / Answer

The annual nominal MARR is ti be calculated fom effective quaterly MARR

((1+.02 )4-1

=8.24% nominal yearly

(a) The present value of all cost can be caluclated using formulacost(1+.0824)-years

=900000 + 500000(1.0824)-20+25000(1-1.0824-20) / .0824

=$1,243,747 is the present value of all cost to build a landfill.

(b) IRR is internal rate of return which shows what return the project offers. This is calculated by comparing the benefit and the lost. SInce benefitof landfill is not given,it is difficult to calculate IRR.

External rate of return is calcualted by equating the initial investment cost to annual and other cost

900000 = 500000(1+i)-20 + 25000(1-(1+i)-20)/i

i=1%

The external rate of return is 1%.

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