The world’s largest carpet maker has just completed a feasibility study of what to do with the 16,000 tons of overruns, rejects, and remnants it produces every year. The company’s CEO launched the feasibility study by asking, why pay someone to dig coal out of the ground and then pay someone else to put our waste into a landfill? Why not just burn our own waste? The company is proposing to build a $10-million power plant to burn its waste as fuel, thereby saving $2.8 million a year in coal purchases. Company engineers have determined that the waste burning plant will be environmentally sound, and after its four-year study period the plant can be sold to a local electric utility for $5 million. (20 points)
a. What is the IRR of this proposed power plant? (Please first use the interpolation method and then use the IRR function in Excel to check your answer. Attach your spreadsheet as part of the solution. As always, your Excel table should show the equations and cell referencing for your calculation).
b. If the firm’s MARR is 15% per year, should this project be undertaken?