Question

Wollongong City is considering the construction of a new waste treatment plant. Land acquisition will cost $120,000. The construction works required for the plant will cost $600,000. Environmental inspection and other expenses will cost $60,000. The plant will be built in Year 0 and will become fully operational in Year 1 for six years (i.e. until Year 6). The annual operating cost for the plant is estimated to be fixed at $120,000 during its anticipated 6-year service life. This waste treatment plant is expected to reduce $12 in the average annual waste treatment fee for each of the 35,000 households that it will serve. The reduction in the annual waste treatment fee and the number of households in Wollongong City are both assumed to be fixed for the 6 years. Changes in the environmental conditions (air pollution and contamination to surrounding lands) must be reflected at the cost of $150,000 at the end of the service life of the plant.

Determine the Net Present Value (NPV), Benefit-Cost Ratio (BCR) and payback period if Wollongong City uses 5% as the discount rate.

Answer 1