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 $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 projects net present value at a discount rate of 16 percent.

b. Determine the projects approximate internal rate of return. (Refer to Appendix 12B if you use the

table approach.)

c. Determine the projects payback period.