Question

2. CI has a poor record of compliance and they must invest in equipment to reduce hazardous waste emissions or face EPA fines of $20,500 per year (This is avoided cost if a Filter is purchased, thus a benefit). A Reduction filter will cost $72,500 and have an expected life of 6 years. CI's MARR (hurdle rate) is 11% Draw the cash flow diagram (7points) b. Solve for IRR of this investment (30 points) Hint: Start with double digit %'s. OK a. to round to nearest %, but show all calculations for credit Is the filter project economically justified based on your IRR and the MARR? Why? (5 рoints) C. 3. 16 Points Two alternatives are competing with one another. The first Alternative is a seven year project, while the second is an eight year project partial credit): (6 points) How must this be solved (pick the BEST answer, no a. i. Solve each independently at their individual PV and compare i. Solve each at the LCM Future Worth and compare i. This can't be solved iv. Solve as Annual Worth v. Solve each at the LCM Present Value and Compare vi. iand iv only vii. ü and v and iv only b. What time horizon wouldyou use to solve this comparison using Future worth? (10 points) i. Seven years ii. Eight years i. Fifteen years iv. FiftySixyears v. All of thе above

Answer 1

If the reduction filter is purchased, the savings every year would be the amount of fine as with the use of filter CI would need not pay the fine.

a. Time 4 0 1 2 3 5 6 Cashflow ($72,500) $20,50o0 $20,500 $20,500 $20,500 $20,500 $20,500

b. Assuming IRR = 15% Time 0 1 2 3 4 5 6 Cashflow ($72,500) $20,500 $20,500 $20,500 $20,500 $20,500 $20,500 Dicounting factor Present Value 1 1.15 1.3225 1.520875 1.749006 2.011357 2.313061 ($72,500) $17,826 $15,501 $5,082 $13,479 $11,721 $10,192 $8,863 NPV NPV is positive, hence IRR is more than 15% Assuming IRR = 17% Time 0 1 2 6 Cashflow Dicounting factor ($72,500) $20,500 $20,500 $20,500 $20,500 $20,500 $20,500 1.17 1 1.3689 1.601613 1.873887 2.192448 2.565164 ($72,500) $17,521 $14,976 $1,078 Present Value $12,800 $10,940 $9,350 $7,992 NPV NPV is still positive, hence IRR is more than 17%

Assuming IRR = 17.5% Time 0 1 2 3 4 5 6 Cashflow ($72,500) $20,500 $20,500 $20,500 $20,500 $20,500 $20,500 Dicounting factor Present Value 1 1.175 1.380625 1.622234 1.906125 2.239697 2.631644 ($72,500) $17,447 $14,848 $12,637$10,755 $9,153 $7,790 NPV $130 NPV is still positive, hence IRR is more than 17.5% Assuming IRR = 17.7% Time 4 0 1 2 3 5 6 Cashflow ($72,500) $20,500 $20,500 $20,500 $20,500 $20,500 $20,500 Dicounting factor Present Value 1 1.177 1.385329 1.630532 1.919136 2.258824 2.658635 ($72,500) $17,417 $14,798 $12,573 $10,682 ($244) $9,076 $7,711 NPV NPV is negative, hence IRR is less than 17.7% IRR value is between 17.5% and 17.7%, hence if rounded off to nearest percent, IRR 18%

Formula files:

A B C D G H 5 6 b 7 Assuming IRR = 0.15 8 9 Time 10 Cashflow C 1 2 3 4 5 6 -72500 20500 =C10 =D10 -E10 =F10 -G10 =(1+$B$7)^E9 - E10 /E11 = (1+$B$7}^D9 =D10/D11 =(1+$B$7)^G9 -G10/G11 11 Dicounting factor 12 Present Value (1+$B$7)^F9 =F10/F11 =(1+$B$7) ^B9 - B10/B11 (1+$B$7)^C9 =C10/C11 (1+$B$7)^H9 =H10/H11 13 NPV -SUM(B12:H12) 14 15 NPV is positive, hence IRR is more th 16 17 Assuming IRR = 0.17 18 19 Time C 1 2 5 6 |- 72500 20 Cashflow 21 Dicounting factor 22 Present Value 20500 C20 =D20 E20 F20 G20 =(1+$B$17)^B19 =(1+$B$17)^C19 (1+$B$17)^D19 (1+$B$17)^E19 (1+$B$17)^F19 (1+$B$17)^G19 =(1+$B$17)^H19 - B20/B21 - E20/E21 F20/F21 -G20/G21 =C20/C21 -D20/D21 -H20/H21 23 NPV -SUM (B22:H22) 24 25 NPV is still positive, hence IRR is mo

A B C D E G H 26 27 Assuming IRR = 0.175 28 29 Time 0 1 2 3 5 6 30 Cashflow 31 Dicounting factor 32 Present Value 33 NPV -72500 20500 -С30 -D30 -E30 F30 G30 (1+$B$27)^B29 (1+$B$27)^C29 1+$B$27)^D29 (1+$B$27)^E29 (1+$B$27)^F29 (1+$B$27)^G29 (1+$B$27)^H29 - E30/E31 -B30/B31 ЕС30/с31 D30/D31 F30/F31 -G30/G31 -нзо/н31 -SUM(B32: H32) 34 35 NPV is still positive, hence IRR is mo 36 37 Assuming IRR = 0.177 38 39 Time 40 Cashflow 41 Dicounting factor 0 1 2 3 6 =D40 F40 EG40 72500 20500 EC40 EE40 =(1+$B$37)^B39 (1+$B$37)^C39 =(1+$B$37)^D39 -(1+$B$37)^E39 -(1+$B$37)^F39 -(1+$B$37)^G39 (1+$B$37)^H39 - E40 /E41 -D40/D41 -F40/F41 - G40 /G41 -B40/B41 C40/C41 H40/H41 42 Present Value 43 NPV =SUM(B42:H42) 44 45 NPV is negative, hence IRR is less tha 46 47 IRR value is between 17.5% and 17.7
c.

CI's hurdle rate = 11%

Since, IRR of the project is higher than the hurdle rate, the NPV of the project would be positive. So, the project is justified.