Cost Reduction Proposal: IRR, NPV, and Payback Period
PA Chemical currently discharges liquid waste into Pittsburghâs municipal sewer system. However,
the Pittsburgh municipal government has informed PA that a surcharge of $5 per thousand cubic liters
will soon be imposed for the discharge of this waste. This has prompted management to evaluate the
desirability of treating its own liquid waste.
A proposed system consists of three elements. The first is a retention basin, which would permit
unusual discharges to be held and treated before entering the downstream system. The second is a
continuous self-cleaning rotary filter required where solids are removed. The third is an automated
neutralization process required where materials are added to control the alkalinity-acidity range.
The system is designed to process 600,000 liters a day. However, management anticipates that
only about 250,000 liters of liquid waste would be processed in a normal workday. The company oper-
ates 300 days per year. The initial investment in the system would be $900,000, and annual operating
costs are predicted to be $162,000. The system has a predicted useful life of ten years and a salvage
value of $70,000.
Required
a. Determine the projectâs net present value at a discount rate of 16 percent.
b. Determine the projectâs approximate internal rate of return. (Refer to Appendix 12B if you use the
table approach.)
c. Determine the projectâs payback period.
Cost Reduction Proposal: IRR, NPV, and Payback Period
PA Chemical currently discharges liquid waste into Pittsburghâs municipal sewer system. However,
the Pittsburgh municipal government has informed PA that a surcharge of $5 per thousand cubic liters
will soon be imposed for the discharge of this waste. This has prompted management to evaluate the
desirability of treating its own liquid waste.
A proposed system consists of three elements. The first is a retention basin, which would permit
unusual discharges to be held and treated before entering the downstream system. The second is a
continuous self-cleaning rotary filter required where solids are removed. The third is an automated
neutralization process required where materials are added to control the alkalinity-acidity range.
The system is designed to process 600,000 liters a day. However, management anticipates that
only about 250,000 liters of liquid waste would be processed in a normal workday. The company oper-
ates 300 days per year. The initial investment in the system would be $900,000, and annual operating
costs are predicted to be $162,000. The system has a predicted useful life of ten years and a salvage
value of $70,000.
Required
a. Determine the projectâs net present value at a discount rate of 16 percent.
b. Determine the projectâs approximate internal rate of return. (Refer to Appendix 12B if you use the
table approach.)
c. Determine the projectâs payback period.
