Question

A waste management company is considering the purchase of an incinerator. One of the
designs considered has an initial cost of $2.5 M, has annual operating and maintenance
costs of $800,000 and requires overhauls every 5 years at a cost of $1,250,000. The
estimated life of the incinerator is 15 years and salvage value of $100,000.
Please identify the costs involved in this problem and classified each according to the
categories discussed in class. Show the cashflow diagram associated with this problem.

Answer 1

The costs involved in the above problem are:

• Initial cost : It is an expense and initial investment made at the beginning of the project.
• Annual operating and maintenance cost : It is also an expense, which includes annual expenses such as labor, electricity etc.
• Overhaul : It is also a major capital expenditure which includes rebuilding or repairing the project.
• Salvage value : It is the receipt, which is received at project termination for sale.

The cash flow diagram is as follows-