RealTurf is considering purchasing an automatic sprinkler system for its sod far

Question

RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $55,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year. It is anticipated that the sprinkler system would be used for 9 years and then sold for a salvage value of $3,500. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $11,000 per year. If the new system is purchased, cost savings of $22,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making.


Show the internal rate of return used to reach your decision:_________%

Based on an internal rate of return analysis, is the purchase of the new sprinkler system economically attractive?

Yes or No

Explanation / Answer

IRR calculation

IRR = 31% (using excel formulae)

Yes, Based on the IRR, the purchase of new sprinkler system is economically attractive because the IRR(31%) is more than the MARR (15%)

Year Cost savings Operating and maintenance Operating income Loan repayment Initial investment Salvage value Net cash flow 0 $0 $0 1 $22,000 $11,000 $11,000 $15,400 -$4,400 2 $22,000 $11,000 $11,000 $15,400 -$4,400 3 $22,000 $11,000 $11,000 $15,400 -$4,400 4 $22,000 $11,000 $11,000 $15,400 -$4,400 5 $22,000 $11,000 $11,000 $11,000 6 $22,000 $11,000 $11,000 $11,000 7 $22,000 $11,000 $11,000 $11,000 8 $22,000 $11,000 $11,000 $11,000 9 $22,000 $11,000 $11,000 $3,500 $14,500

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