Question
Harrison Township is studying a 700-acre site for a new landfill. The new site will save $70,000 in annual operating costs for 10 years, as
Harrison Township is studying a 700-acre site for a new landfill. The new site will save $70,000 in annual operating costs for 10 years, as Harrison currently uses the landfill of a neighboring municipality. Other data are:
Purchase price per acre: $550
Site preparation costs: $110,000
Required Rate of Return for Harrison Township: 6%
Ignore income taxes. Use the following annuity value table to solve the problem
Present Value of a Series of $1 (i.e. an annuity) Cash Flows | Present value of $1 | ||||||||
Periods | 4% | 6% | 8% | 10% | 4% | 6% | 8% | 10% | |
1 | 0.962 | 0.943 | 0.926 | 0.909 | 0.962 | 0.943 | 0.926 | 0.909 | |
2 | 1.886 | 1.833 | 1.783 | 1.736 | 0.925 | 0.890 | 0.857 | 0.826 | |
3 | 2.775 | 2.673 | 2.577 | 2.487 | 0.889 | 0.840 | 0.794 | 0.751 | |
4 | 3.630 | 3.465 | 3.312 | 3.170 | 0.855 | 0.792 | 0.735 | 0.683 | |
5 | 4.452 | 4.212 | 3.993 | 3.791 | 0.822 | 0.747 | 0.681 | 0.621 | |
6 | 5.242 | 4.917 | 4.623 | 4.355 | 0.790 | 0.705 | 0.630 | 0.564 | |
7 | 6.002 | 5.582 | 5.206 | 4.868 | 0.760 | 0.665 | 0.583 | 0.513 | |
8 | 6.733 | 6.210 | 5.747 | 5.335 | 0.731 | 0.627 | 0.540 | 0.467 | |
9 | 7.435 | 6.802 | 6.247 | 5.759 | 0.703 | 0.592 | 0.500 | 0.424 | |
10 | 8.111 | 7.360 | 6.710 | 6.145 | 0.676 | 0.558 | 0.463 | 0.386 | |
(3 + 2+ 3 + 2 = 10 points)
Required:
Use the net-present-value method and determine whether the landfill should be acquired.
Determine the landfill's internal rate of return (round off to two digits).
Find the payback and modified (discounted) payback period for the project.
What is the accounting rate of return using initial investment?
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