Cost Reduction Proposal: IRR, NPV, and Payback Period

PA Chemical currently discharges liquid waste into Pittsburghs municipal sewer system. However, the Pittsburgh municipal government has informed PA that a surcharge of $6 per thousand 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 700,000 liters a day. However, management anticipates that only about 350,000 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 $1,500,000, and annual operating costs are predicted to be $280,000. The system has a predicted useful life of 10 years and a salvage value of $100,000.

(a) Determine the project's net present value at a discount rate of 14 percent. (Round to the nearest whole number.)

(b) Determine the project's approximate internal rate of return. Round answer to the nearest percentage (ex: 15%)

(c) Determine the project's payback period. (Round answer to two decimal places.)