Refer to given problem.
(a) Convert the actual cash flows into real cash flows.
(b) Find the present worth of the project using the real ALARR.
(c) Should they invest?
Problem:
A group of fanners in Inverness is considering building an irrigation system from a water supply in some nearby mountains. They want to build a concrete reservoir with a steel pipe system. The first cost would be £200 000 with (actual) annual maintenance costs of £2000. They expect the irrigation system will bring them £22 000 per year in additional (actual) revenues due to better crop production. Their real pound ALARR is 4% and they anticipate inflation to be 3% per year. .Assume that the reservoir will have a 20-year life.
(a) Using the actual cash flows, find the actual IRR on this project.
(b) What is the actual ALARR?
(c) Should they invest?