Question

A plasma arc furnace has an internal combustion temperature of 7,000 degree C and is being considered for the incineration of medical wastes at Mercy hospital. The initial investment for the hospital is $350,000 and annual revenues are expected to be $185,000 over the 6 year life of the furnace. Annual expenses will be $100,000 at the end of year 1 and due to maintenance will increase by $5000 each year thereafter. The resale value of the furnace is $20,000. What is the internal rate of return for this project.

Answer 1

1. Using excel as in the below cash flow we can find IRR where NPV becomes positive or directly using IRR function

Year	Cost	Benefit	Net cashflow
0	350000		-350000
1	100000	185000	85000
2	105000	185000	80000
3	110000	185000	75000
4	115000	185000	70000
5	120000	185000	65000
6	125000	205000	80000
		NPV	₹ 26.77
		IRR	8.28%

2. Or using formula

lower discount rate+(NPV at lower discount rate/(NPV at lower discount rate-NPV at higher discount rate)*(higher discount rate-lower discount rate)

Year	Cost	Benefit	Net cashflow	NPV at 10%	NPV at 5%
0	350000		-350000	-350000	-350000
1	100000	185000	85000	77273	80952
2	105000	185000	80000	66116	72562
3	110000	185000	75000	56349	64788
4	115000	185000	70000	47811	57589
5	120000	185000	65000	40360	50929
6	125000	205000	80000	45158	59697
			NPV	-16934	36518

=0.05+((36518/(36518+16934)))*(0.1-0.05)

= 8.42%