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.
Construction will take two years, and the capital will be paid in two equal increments, at the end of the first and second years. The savings (income) can be taken as paid at the end of each year. Production will start on the completion of construction.