Answer to Question #315495 in Mechanical Engineering for Lubabalo

Question

In order to reduce cooling electricity consumption in an industrial plant, it is proposed to install an absorption refrigeration system running on solar energy. The absorption system costs $300,000 and the operating and maintenance expenses are $8000 per year. It is estimated that this absorption system will save $27,500 per year from the electricity they save. The lifetime of the system is expected to be 20 years with an average annual inflation-adjusted interest rate of 4 percent. The system will have no salvage value after 20 years of its lifetime. Would you support this project from an economic point of view? How would you evaluate this project if the inflation-adjusted interest rate is 2 percent?

Answer 1

The inflation-adjusted return is the measure of return that takes into account the time period's inflation rate. The purpose of the inflation-adjusted return metric is to reveal the return on an investment after removing the effects of inflation.

Removing the effects of inflation from the return of an investment allows the investor to see the true earning potential of the security without external economic forces. The inflation-adjusted return is also known as the real rate of return.