RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $20,000 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 $500. Annual operating and maintenance expenses for the system over the 9-year life are estimated to be $7,000 per year. If the new system is purchased, cost savings of $10,000 per year will be realized over the present manual watering system. RealTurf uses a MARR of 15%/year for economic decision making.
Show the internal rate of return used to reach your decision:
Based on an internal rate of return analysis, is the purchase of the new sprinkler system economically attractive?