Question

A rural utility company provides standby power to pumping stations using diesel-powered generators. An alternative has arisen whereby the utility could use a combination of wind and solar power to run its generators, but it will be a few years before the alternative energy systems are available. The utility estimates that the new systems will result in savings of $15,000 per year for 3 years, starting 2 years from now and $25,000 per year for 4 more years after that, i.e., through year 8. At an interest rate of 8% per year, determine the equivalent annual worth for years 1 through 8 of the projected savings.

Answer 1

Savings from year 2 to 4 years = $15,000

Savings for the next 4 years (year 5 to 8) = $25,000

Life = 8 years

Interest Rate = 8%

Calculate the equivalent annual worth for years 1 through 8 of the projected savings.

Step 1

Calculate PW

PW = $15,000 (P/A, 8%, 3) (P/F, 8%, 1) + $25,000 (P/A, 8%, 4) (P/F, 8%, 4)

PW = $15,000 (2.57710) (0.92593) + $25,000 (3.31213) (0.73503) = $96,656

Step 2

Calculate equivalent annual worth.

EAW = PW (A/P, 8%, 8)

EAW = $96,656 (0.17401)

EAW = $16,819