Question

3. A government is considering installing solar panels on many of its buildings. Installing solar

panels would cost $5 billion today, but it would save $1 billion in energy costs every year

for the next 7 years (starting from next year).

(a) Suppose the interest rate is 5%. What is the present discounted value of the savings in

energy costs over 7 years if solar panels are installed now? Based on your calculation,

is the project of installing solar panels worth undertaking?

(b) Answer the same question as in (a) if the interest rate is 10%.

(c) A politician says to you, \I don't care what the interest rate is. The project is clearly

a good investment: it more than pays for itself in only 5 years, and all the rest is

money in the bank." What's wrong with this argument, and why does the interest rate

matter?

You can use a calculator or excel spreadsheet to compute, but write down the equation you

use to compute.

Answer 1