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

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 $249,000 and annual revenues are expected to be $166,000 over the eight-year life of the furnace. Annual expenses will be $109,000 at the end of year one and will increase by $5,000 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?

Explanation / Answer

a) Simple payback period is the time taken to recover the initial investment.

Simple payback period = 5 + (249000 - 57000 - 52000 - 47000 - 42000 -37000)/32000 = 5.4375 years

b)

IRR = r

249000 = 57000/(1 + r) + 52000/(1 + r)2 + ... + 43000/(1 + r)8

Solve for 'r':

r = 8.1%

Year Annual Revenues ($) Annual Expenses ($) Net Revenues ($) 1 166000 109000 57000 2 166000 114000 52000 3 166000 119000 47000 4 166000 124000 42000 5 166000 129000 37000 6 166000 134000 32000 7 166000 139000 27000 8 187000 144000 43000

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