Question

A plasma arc furnace is being considered for the incineration of medical wastes at a public hospital. The initial investment is $3,000,000 and annual revenues are expected to be $1,800,000 over the six-year life of the furnace. Annual expenses will be $1,000,000 at the end of year one. The salvage value of the furnace after six years is $700,000. Assume MARR is 10%.

What is the Internal Rate of Return (IRR) on this furnace? Try 10% and 20%, and then use the interpolation method to find the IRR. (correct your final answer to two decimal places)

Answer 1

Initial investment = - $ 3,000,000 = $ 3 million

Annual revenue = $ 1,800,000 = $ 1.8 million

Annual expense = $ 1,000,000 = $ 1 million

Salvage value = $ 700,000 = $ 0.7 million

Useful life = 6 years

The net present worth can be calculated as follows

Assume rate = 10%

Now assume rate = 20%

On solving above equation we get

NPW(20%) = - $ 0.10516332 million

Now apply linear interpolation

Internal rate of return = 18.93%

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