Question

The city of Metropolis is considering replacing incandescent bulbs in traffic lights with light-emitting diode (LED) lights because they use significantly less energy and last much longer without abrupt failure. Currently Metropolis has 80,000 incandescent bulbs in traffic lights at approximately 12,000 intersections. It is estimated that replacing all the incandescent bulbs with LED will cost $46.02 million. However, the investment is also estimated to save the city $8.85 million per year in energy costs. Answer the following questions on a Word Doc or Excel Spreadsheet and upload here.

1-  Determine the payback period of converting Metropolis’s traffic lights to LEDs.

2- If the average life of an incandescent traffic light is one year and the average life of an LED traffic light is seven years, should the city finance the investment in LED’s at an interest rate of 5% per year? Support your answer by showing calculations or copying and pasting your spreadsheet.  

3- Assume the project manager for the city of Metropolis asked you to provide justification for the project. Write a brief email to the project manager describing why or why not Metropolis should invest in LED lights using the support figures you calculated for #2.

Answer 1

Part 1			Investments	46.02Million
			Savings Per Year	8.85Million
		Calculation of payback period
		Year	Energy Savings	Cumulative Savings
		1	8.85	8.85
		2	8.85	17.7
		3	8.85	26.55
		4	8.85	35.4
		5	8.85	44.25
		6	8.85	53.1
		Payback = 5+(46.02-44.25)/8.85		5.2Years
Part 2 & 3			Particulars	Amount
			Investments	46.02
			Savings each year	8.85
			P.V Factor( 5%,7)	5.786
			Total Savings in present value (8.85*5.786)	51.21
		As the amount of investment is less than the amount of savings in present value city should finance the investment in LED's