A plasma arc furnace has an internal combustion temperature of 7,000◦ Cand is being considered for the incineration of medical wastes at a local hospital. The initial investment is $300,000 and annual revenues are expected to be $175,000 over the six-year life of the furnace. Annual expenses will

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 $300,000 and annual revenues are expected to be $175,000 over the six-year life of the furnace. Annual expenses will be $100,000 at the end of year one and will increase by $5,000 each year thereafter. The resale value of the furnace after six years is $20,000.

a. What is the simple payback period of the furnace?

b. What is the internal rate of return on the furnace?

a. What is the simple payback period of the furnace?

b. What is the internal rate of return on the furnace?

Accepted Answer

(a) The sum of positive cash flows through year five is $325,000, which marginally exceeds the initial investment of $300,000. Therefore, the simple payback period is five years.

(b) To find the IRR, we must solve this equation:

0 = −$300,000 + $75,000 (P/A, [latex]\acute{i}[/latex], 6) − $5,000 (P/G, [latex]\acute{i}[/latex], 6)+ $20,000 (P/F, [latex]\acute{i}[/latex], 6)
By trial and error (or with Excel), we can determine that [latex]\acute{i}[/latex] = 8.76%.

Question 5.EE: A plasma arc furnace has an internal combustion temperature ...

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