Engineering Economy - please solve in deep detials !! A company is considering m
ID: 2428820 • Letter: E
Question
Engineering Economy - please solve in deep detials !!
A company is considering managing medical waste at a local hospital. The initial investment for the incineration (furnace) of waste is 150,000 and annual revenues are expected to be $125,000 over the six-year life of the furnace. Annual expenses will be $80,000 at the end of first year and $90,000 thereafter. The salvage value of the furnace at the end of six years will be $15,000. Calculate the payback period for the furnace at MARR 8% and compare it with the payback period at MARR 0%. Use the following table for calculation.Explanation / Answer
When MARR = 0%
Net cashflow today Time 0 = -150,000
Net cashflow at Time 1 = 125,000 - 80,000 = 45,000
Net cashflow at Time 2 = 125,000 - 90,000 = 35,000
Net cashflow at Time 3 = 125,000 - 90,000 = 35,000
Net cashflow at Time 4 = 125,000 - 90,000 = 35,000
Net cashflow at Time 5 = 125,000 - 90,000 = 35,000
Net cashflow at Time 6 = 125,000 - 90,000 +15,000 = 50,000
Payback period is the year in which the sum of the net cashflows becomes zero or positive.
So, we see that -150 + 45 + 35 +35 +35 = 0.
Thus in 4 years the breakeven is reached. hence Payback period is 4 years
MARR = 8%
Now, we discount the cashflows at 8%
So -150 + 45/ (1.08) + 35/(1.08)2 +35/(1.08)3 +35/ (1.08)4 + 35/(1.08)5 = -0.99 = -1.00 approximately.
So in the next year the breakeven point will be achieved.
Hence, payback period is 5 years here because the residual amount is very low.
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