Dyno-max is considering buying a new water treatment system. The investment proposal passed the initial screening tests (payback period and rate of return) so the company now wants to analyze the proposal using the discounted cash flow methods. Recall that the water treatment system costs $48,000, has a five-year life, and no residual value. The estimated net cash inflows from environmental cleanup savings are $13,000 per year over its life. The company's required rate of return is 16%.
Requirements
1. Compute the water treatment system's NPV.
2. Find the water treatment system's IRR (exact percentage is not required).
3. Should Dyno-max buy the water treatment system? Why?