Question

6.(12 pts.) Hastings Chemical Corporation is planning to expand one of its propylene manufacturing facilities. The land costs $300,000, the building costs $600,000, the equipment costs $250,000, and a $100,000 start-up cost is required. It is expected that the product will result in sales of $625,000 per year for 12 years, at which time the land can be sold for $300,000, the building for $200,000, and the equipment for $50,000. The annual disbursements for labor, materials, and all other expenses are estimated to be $425,000. Determine the internal rate of return for this project to the nearest 1%.

Answer 1

First cost = 300,000 + 600,000 + 250,000 + 100,000 = 1,250,000

Annual net benefit, years 1-11 = Revenue - Cost = 625,000 - 425,000 = 200,000

Annual net benefit, year 12 = Revenue - Cost + Salvage value = 200,000 + (300,000 + 200,000 + 50,000) = 750,000

IRR is computed using Excel IRR function.

Year	Cash Flow ($)
0	-12,50,000
1	2,00,000
2	2,00,000
3	2,00,000
4	2,00,000
5	2,00,000
6	2,00,000
7	2,00,000
8	2,00,000
9	2,00,000
10	2,00,000
11	2,00,000
12	7,50,000
IRR =	14%