A plasma arc furnace has an internal combustion temperature of 7,000°C and is be

Question

A plasma arc furnace has an internal combustion temperature of 7,000°C and is being considered for the incineration of medical wastes at a local hospital. The initial investment is $310,000 and annual revenues are expected to be $171,000 over the eight-year life of the furnace. Annual expenses will be $106,000 at the end of year one and will increase by $4,500 each year thereafter. The resale value of the furnace after eight years is $21,000 a. What is the simple payback period of the furnace? b. What is the internal rate of return on the furnace? a. The simple payback period of the furnace is 6 years. (Round up to the nearest whole number.) mon the furnace isD-(Round to b, The internal rate of return on the fumace is %. (Round to one decimal place.)

Explanation / Answer

Net annual benefit (NAB) = Annual revenue - Annual expense

(a)

Simple payback period (PBP) is the time by when cumulative NAB equal zero.

From above table, PBP lies between years 5 & 6.

PBP = 5 + (Absolute value of cumulative NCF in year 5 / NCF in year 6)

= 5 + (30,000 / 42,500) = 5 + 0.71 = 5.71 years

~ 6 years

(b)

IRR is computed using Excel IRR function, computed in above table.

IRR = 7.5%

Year Revenue ($) Expense ($) NAB ($) Cumulative NAB ($) 0 3,10,000 -3,10,000 -3,10,000 1 1,71,000 1,06,000 65,000 -2,45,000 2 1,71,000 1,10,500 60,500 -1,84,500 3 1,71,000 1,15,000 56,000 -1,28,500 4 1,71,000 1,19,500 51,500 -77,000 5 1,71,000 1,24,000 47,000 -30,000 6 1,71,000 1,28,500 42,500 12,500 7 1,71,000 1,33,000 38,000 50,500 8 1,92,000 1,37,500 54,500 1,05,000 IRR = 7.5%

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