Question

flow diagram chart please

6. Carlisle Company has been cited and must invest in equipment to red stack emissions or face EPA fines of $18,500 per year. An emission reduction filter will cost $75,000 and have an expected life of 5 years. Carlisle's MARR is 10%/yr. a. What is the internal rate of return of this investment? b. What is the decision rule for judging the attractiveness of investments based on internal rate of return? c. Is the filter economically justified?

Answer 1

a) IRR of the investment is when the NPV = 0. If we invest 75000 now in the equipment we will be saving 18500 per year that we dont need to pay for penalty.

Year	CF	Discount Factor		Discounted CF
0	$ -75,000.00	1/(1+0.0742411377785078)^0=	1	1*-75000=	-75,000.00
1	$   18,500.00	1/(1+0.0742411377785078)^1=	0.93088969	0.930889690249588*18500=	17,221.46
2	$   18,500.00	1/(1+0.0742411377785078)^2=	0.866555615	0.866555615412974*18500=	16,031.28
3	$   18,500.00	1/(1+0.0742411377785078)^3=	0.806667688	0.806667688415824*18500=	14,923.35
4	$   18,500.00	1/(1+0.0742411377785078)^4=	0.750918635	0.750918634603758*18500=	13,891.99
5	$   18,500.00	1/(1+0.0742411377785078)^5=	0.699022415	0.699022415168936*18500=	12,931.91
				NPV = Sum of all Discounted CF	0.00

• IRR can be calculated using either a financial calculator or excel or through hit and trial:
• Using Excel we get the IRR = 7.42 rounded to two decimal places
  

b) Decision rule is that if IRR is greater than the MARR, then the project should be selected while if it is lower than the MARR then the project should not be selected

c) As the IRR is 7.42% and the MARR is % then the project should not be selected