Question: Cost Reduction Proposal: IRR, NPV, and Payback Period
JB Chemical currently discharges liquid waste into Calgary's municipal sewer system. However, the Calgary municipal government has informed JB that a surcharge of $4 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 500,000 liters a day. However, management anticipates that only about 200,000 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 $450,000, and annual operating costs are predicted to be $142,000. The system has a predicted useful life of ten years and a salvage value of $50,000.
(a) Determine the project's net present value at a discount rate of 16 percent. (Round to the nearest whole number.)
(b) Determine the project's approximate internal rate of return.
(c) Determine the project's payback period. (Round answer to two decimal places.)