719 Switching to powder coating technology will reduce the emission of volatile

Question

719

Switching to powder coating technology will reduce the emission of volatile organic carbons (VOCs) for a firm's production process. The initial cost is dollar 200,000 with annual costs of dollar 50,000 and savings of dollar 90,000 in the first year. Savings are projected to increase by dollar 3000 annually after Year 1. The salvage value 10 years from now is projected to be dollar 30,000. What rate of return will the firm make on this investment? Contributed by Hamed Kashani, Saeid Sadri, and Baabak Ashuri, Georgia Institute of Technology

Explanation / Answer

Year Intial Cost Savings Costs Net Cash flow 0 $200,000 -$200,000 1 $90,000 -$50,000 $40,000 2 $93,000 -$50,000 $43,000 3 $96,000 -$50,000 $46,000 4 $99,000 -$50,000 $49,000 5 $102,000 -$50,000 $52,000 6 $105,000 -$50,000 $55,000 7 $108,000 -$50,000 $58,000 8 $111,000 -$50,000 $61,000 9 $114,000 -$50,000 $64,000 10 $117,000 -$50,000 $97,000 IRR 21.44% Year 10 net cash flow is inclusive of salvage value

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