Determination of the payback period of the investment

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Reference no: EM133007842

Question: You are the energy manager of Beatson Clark, a glass recycling and manufacturing company which collects used glass, melts it in its furnace and casts it into new forms.

The furnace is fired by natural gas purchased from the national gas grid. The company is considering installing an Organic Rankine Cycle (ORC) to capture waste heat in the flue gases and use it to produce electrical power. The power can be exported to the grid for a profit. You have contacted a potential supplier, Turboden Ltd., which installs and maintains ORC equipment.

The technical appraisal of the ORC (provided by the supplier) forecasts a £182,000 increase in annual profits due to this proposed installation. The ORC has a guaranteed life of four years.

Using the data provided, answer the questions that follow.

Capital cost of the ORC unit and auxiliaries = £ 518,790

ERDF grant (payable in year 1) = 10% of initial capital (non-taxable)

Corporation tax on profit = 20% ? Discount rate after Tax = 13.3%

Scrap value at the end of year 4 = £ 60,000

Tax on profits is payable from years 2 to 5 inclusive (i.e. one year in arrears).

Your task is to independently analyse the data provided by the supplier and produce a poster (Size A0 - Landscape) for the management of your company with your recommendations about commissioning the ORC.

The poster should be typed and professionally presented. As the management are not energy managers, they may not understand the significance or technical details of ORC. It is your responsibility to discuss the implications of the results of this investment to them in the poster. The poster should include the following:

A brief and visual explanation of the technology and its suitability for the application.

Determination of the payback period of the investment in the ORC and suggestion if this value makes the investment appear financially viable.

A cash flow table over a 5 year period for the investment, predicting the PV for each year and the overall NPV for the investment in the ORC. Conclusions about the viability of the investment.

Savings of carbon and environmental impact

Recommendations on the next steps for the firm''s management.

Other factors to be considered when selecting the discount rate and the impact on the NPV of raising the discount rate for this particular investment.

Exploration of any government grants available which can make this investment (more) profitable.

Search of the market for alternative suppliers and better ROI.

A case study where ORC has been implemented in a similar situation

Reference no: EM133007842

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