Reference no: EM13863709
Cost Reduction Proposal: IRR, NPV, and Payback Period
JB Chemical currently discharges liquid waste into Calgary's municipal sewer system. However, the Calgary municipal government has informed JB that a surcharge of $4 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 500,000 liters a day. However, management anticipates that only about 200,000 liters of liquid waste would be processed in a normal workday. The company operates 300 days per year. The initial investment in the system would be $450,000, and annual operating costs are predicted to be $150,000. The system has a predicted useful life of ten years and a salvage value of $50,000.
Required
a. Determine the project's net present value at a discount rate of 14 percent.
b. Determine the project's approximate internal rate of return. (Refer to Appendix 12B if you use the table approach.)
c. Determine the project's payback period.
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