An entrepreneurial mechanical engineer started a tire shredding business to take
advantage of a Texas state law that outlaws the disposal of whole tires in sanitary
landfills. The cost of the shredder was $220,000. She spent $15,000 to get 460 Volt
power to the site and another $76,000 in site preparation. Through contrcts with tire
dealers, she was paid $2 per tire and handled an average of 12,00 tires per month for 3
years. The annual operating costs for labor. power. repairs, etc. amounted to $1.05 per
tire. She also sold some of the tire chips to septic tanks installers for use in drain fields .
This endeavor netted $2000 per month. After 3 years, she sold the equipment for
$100,000. What rate of return did she make a) per month b) per year (nominal and
effective)
Answer :
Cost of project = Cost of shredder + Power cost + Site preparation
= 220000 + 15000 + 76000 = 311000
Earnings per month = 12000 * (2-1.05) + 2000 = 13400
Rate of return per month = Earnings / Cost of project = 13400 / 311000 = 4.31%
Per year nominal = 4.31 * 12 = 51.72%
Per year effective = (1+r) 12 – 1 = (1.0431)12 – 1 = 65.93%