Page 136 - Solid Waste Analysis and Minimization a Systems Approach

114 METRICS AND PERFORMANCE MEASUREMENT FOR SOLID WASTE MANAGEMENT

1 Initial investment
2 Payback period (and discounted payback period)
3 Internal rate of return

The initial investment is the start-up funds required to begin a given solid waste
minimization program. This includes the cost for recycling bins, recycling provider
fees, recycling equipment costs (balers, grinders, or electric hand dryers), and
training costs. The payback period is the period of time (usually given in years)
required for the project’s profit or other benefits to equal the project’s initial invest-
ment. The equation is

Payback period = cost
s
uniform annual benefits

The payback period measures how long the project will take to recoup the initial
investment, or in other words gauges the rapid return of investment for an organiza-
tion. Many organizations use the payback period as a litmus test to screen projects
based on a predetermined threshold, say 3 to 4 years for many companies. There are
some limitations to the payback period, such as

■ The payback period is an approximation, not and exact economic analysis.
■ All costs and all profits (or savings) of the investment before payback are included
without considering differences in timing.
■ All economic consequences after the payback period are ignored.
■ Being an approximation, the payback period may not select the optimal project.

The internal rate of return (IRR) is the interest rate at which the present worth and
equivalent annual worth of a project are equal to zero. Another way to think about the
IRR is the annualized interest rate that a project earns over its life. In most cases,
organizations have a predetermined minimum attractive rate of return (MARR), which
is the minimum interest rate that the organization could accept as the return on a proj-
ect and still remain profitable. For a given project, if the IRR is greater than or equal
to the MARR, it is a profitable decision to accept the project. To solve IRR, the net
present worth (NPW) is set equal to zero, as shown in the following equation:

n
NPW = ∑ C t = 0

= t 1 (1 + r) t

where t = the time of the cash flow
n = the total time of the project
r = the discount rate (the rate of return that could be earned on an investment
in the financial markets with similar risk)
C = the net cash flow (the amount of cash) at time t
t