Fulton 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 Fulton currently uses the landfill of a neighboring municipality. Other data are: Purchase price per acre: $550Site preparation costs: $110,000Hurdle rate: 6%Ignore income taxes.YearFV of $1 at 6%FV of an ordinary annuity at 6% PV of $1 at 6%PV of an ordinary annuity at 6% 11.0601.0000.9430.94321.1242.0600.8901.83331.1913.1840.8402.67341.2634.3750.7923.46551.3385.6370.7474.21261.4196.9750.7054.91771.5048.3940.6655.58281.5949.8980.6276.21091.69011.4910.5926.802101.79113.1810.5587.360
Required:A. Use the
net-present-value method and determine whether the landfill should be acquired.B. Determine the landfill's approximate internal rate of return, using the tables above.
What will be an ideal response?
A.
| Purchase price (700 × $550) | $(385,000) × 1.0 | $(385,000) |
| Site preparation | $(110,000) × 1.0 | (110,000) |
| Savings in operating costs | $70,000 × 7.360 | 515,200 |
| Total | ? | $20,200 |
Yes, the landfill should be acquired because it has a positive net present value.
B. Let X = present value factor
$70,000X = ($385,000 + $110,000)
X = 7.071
A review of annuity factors for 10 years finds an internal rate of return that falls between 6% (7.360) and 8% (6.710).
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