The city of Opelika was having a problem ting land for a new sanitary landfill when the Alabama Energy Extension Service offered the solution of burning the solid waste to generate steam. At the same time, Uniroyal Tire Company seemed to be having a similar problem disposing of solid waste to in the form of rubber tires. It was determined that there would be about 200 tons per day of waste to be burned, including municipal and industrial waste. The city is considering building a waste-fired steam plant, which would cost $6,688,800. To finance the construction cost, the city will issue resource-recovery revenue bonds in the amount of $7,000,000 at an interest rate of 11.5%. Bond interest is payable annually. The differential amount between the actual construction costs and the amount of bond financing
($7,000,000 - $6,688,800 = $311,200)
will be used to settle the bond discount and expenses associated with the bond financing. The expected life of the steam plant is 20 years. The expected salvage value is estimated to be about $300,000. The expected labor costs are $335,000 per year. The annual operating and maintenance costs (including fuel, electricity, maintenance, and water) are expected to be $175,000. The plant would generate 9,360 pounds of waste, along with 7,200 pounds of waste alter incineration, which will have to be disposed of as landfill. At the present rate of $19.45 per pound, this will cost the city a total of $322,000 per year.
The revenues for the steam plant will come from two (1) sales of steam and (2) tipping fees for disposal. The city expects 20% downtime per year for the waste-fired steam plant. With an input of 200 tons per day and 3.01 pounds of steam per pound of refuse, a maximum of 1,327,453 pounds of steam can be produced per day. However, with 20% downtime, the actual output would be 1,061,962 pounds of steam per day. The initial steam charge will be approximately $4.00 per thousand pounds, which will bring in $1,550,520 in steam revenue the first year and every year thereafter. The tipping fee is used in conjunction with the sale of steam to offset the total plant cost. It is the goal of the Opelika steam plant to phase out the tipping fee as soon as possible. The tipping fee will be $20.85 per ton in the first year of plant operation and will be phased out at the end of the eighth year. The scheduled tipping fee assessment is as follows:
Year Tipping Fee
1.................................$976,114
2................................. 895.723
3................................. 800.275
4................................. 687,153
5................................. 553,301
6................................. 395,161
7................................. 208,585
(a) At an interest rate of 10%, would the steam plant generate sufficient revenue to recover the initial investment?
(b) At an interest rate of 10%, what would be the minimum charge (per thousand pounds) for steam sales to make the project break even?
(c) Perform a sensitivity analysis to determine the input variable of the plant's downtime.