Question

A computer call center is going to replace all of its incandescent lamps with more energy efficient fluorescent lighting fixtures. The total energy savings are estimated to be ​$2118 per​ year, and the cost of purchasing and installing the fluorescent fixtures is ​$5100. The study period is fivefive ​years, and terminal market values for the fixtures are negligible.

a. What is the IRR of this​ investment?

b. What is the simple payback period of the​ investment?

c. Is there a conflict in the answers to Parts​ (a) and​ (b)? List your assumptions.

d. The simple payback​ "rate of​ return" is ​1/thetaθ =

Answer 1

a. PVF(IRR,n) = ∆P/∆A = 5100 / 2118 = 2.41

Looking up to the PV function IRR table at 5years the IRR is just over 31%

Alternatively, Using financial calculator= 31.65%

b. Simple payback = ∆P/∆A = 5100 / 2118 = 2.41 years

c. There is not a major conflict as such. Using a simple payback period to judge a project can be misleading and it can be more useful when the payback is translated in to an internal rate of return. When the lifetime of the project exceeds the simple payback ,the IRR moves closer to the initial rate of return.

d. simple payback​ "rate of​ return" is ​1/thetaθ = 1/2.41= 41.49%