The purchase of the new sprinkler system justified

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Reference no: EM131318009

RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $25,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year. It is anticipated that the sprinkler system would be used for 9 years and then sold for a salvage value of $1,500. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $8,500 per year. If the new system is purchased, cost savings of $15,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making.

Based on an internal rate of return analysis, is the purchase of the new sprinkler system justified? Show the internal rate of return used to reach your decision.

Reference no: EM131318009

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