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?