External rate of return from switching to reclaimed water

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Suppose that Dr. Stone brewery could use recliamed municipal water waste water to make beer instead of the municipal water that is currently being used. this will help conserve limited fresh water resources and reduce the brewery's annual water bill. To use recliamed waste water the brewery will need purchase new water treatment equipment for $125,000. Water treatment operating cost (filters and chemicals) would be $5,000 annually. Dr. Stone estimates that the brewery would save $10,000 in the first year from reduced municipal water bills, and these savings will grow by 3% per year based on the expected increase in municipal water rates over time. The water treatment equipment has a useful life of 25 years and a savage value of $10,000.

a) What is the internal rate of return from switching to recliamed water? Complete by hand show all work.

b) If the Brewery's MARR is 6%, is this a good investment?

c) What is the external rate of return from switching to reclaimed water? Do by hand show all work.

d) What are at least two limitations of using the IRR method and how does the ERR metod aviod these limitations?

Reference no: EM131083569

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