Question

Assuming a house-holds appliances are all upgraded to 5 star energy ratings, the unconstrained economic analysis outputs the following:

1. Initial Cost of the Appliances = $1624

2. Annual Return = $38.78

Task: Compute the payback period by performing an 8 year unconstrained economic analysis and simply payback period. From this analysis, comment on whether a change in the energy rating of the appliances is cost-effective or not.

Answer 1

Payback period (PBP) is the time by when cumulative cash flow equals zero.

Cumulative cash flow in year 41 = $38.78 x 41 = $1589.98

Cumulative cash flow in year 42 = $38.78 x 42 = $1628.76

Therefore, PBP lies between years 41 and 42.

Since economic analysis is to be done for 8 years, the initial cost of $1624 will not be recovered using future annual cash flows within 8 years (which is assumed the cut-off PBP). Therefore this appliance is not cost effective.