Question

A plant is proposing to install a combined heat and power system to supply electrical power and process steam. Power is currently taken from a utility company and steam is generated using on-site boilers. The capital cost of the CHP plant is estimated to be $23 million. Combined heat and power is expected to give net savings of $10 million per year. The plant is expected to operate for 10 years after the completion of construction. Calculate the cumulative net present value of the project, at a discount rate of 12%, using MACRS depreciation with a seven-year recovery term. Also, calculate the discounted cash flow rate of return.

Answer 1

Answer:

Cumulative net present value of the project is:

= $33.5 million.

The discounted cash flow rate of return is:

= 26%

Explanation:

a) Data and Calculations:

The capital cost of the combined heat and power system = $23 million

Expected net savings per year = $10 million

Project period = 10 years

Discount rate = 12%

Annuity PV factor for 10 years at 12% = 5.650

Total PV of the cash flows = $56.5 million (5.650 * $10 million)

NPV of the project = $33.5 million

Annualized NPV = $33.5 million/5.650

= $5,929,204

Discounted cash flow rate of return = Annualized NPV/Investment * 100

= $5,929,204/$23,000,000 * 100 = 26%