Determine the IROR and profitability index at 12% per year for an industrial smart-grid system that has a first cost of $400,000, an AOC of $75,000 per year, estimated annual savings of $192,000, and a salvage value of 20% of its first cost after a 5-year useful life.

What will be an ideal response?


IROR:
0 = -400,000 + (192,000 – 75,000)(P/A,i*,5) + 80,000(P/F,i*,5)
i* = 18.09%

PI:
PW of NCF = (192,000 – 75,000)(P/A,12%,5) + 400,000(0.20)(P/F,12%,5)
= (192,000 – 75,000)(3.6048) + 80,000(0.5674)
= $467,154

PW of first cost = -400,000

PI = 467,154/400,000
= 1.17

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