A town in Wyoming wants to drill geothermal well to provide a district heating s

Question

A town in Wyoming wants to drill geothermal well to provide a district heating steam and hot water for its businesses and residences. After government subsidies, the capital investment for the well is $540,000 and the geothermal well will reduce natural gas consumption for steam and hot water production by $52,000 per year. The salvage value of the well is negligible. The simple payback period for the well is 10 years. If the MARR of the town is 8% and the life of the geothermal well is 27 years, what is the IRR for this project?

Explanation / Answer

to calculate IRR,

540,000 = 52,000*PVIFA(IRR,27)

PVIFA(IRR,27) = 540,000/52,000 = 10.3846

[1-(1+IRR)^-27]/IRR = 10.3846

now using hit and trial or from calculator

IRR = 8.589%

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