Question

An energy manager is evaluating the purchase of two water heating systems. The first system has a standard efficiency of 85%. The system will cost $9,500 to install with an annual operating cost of $7,500. The second system has high efficiency of 94%. This system will cost $15,500 to install and has an annual operating cost of $4,700. Both systems will last 14 years. The discount rate of the organization is 15%. Which system would you recommend for purchase based on the least negative Net Present Value?

Answer 1

Answer -

It is natural to think in order to compare the economy,
We could use the Annual Value

Where second systems annual value is lower than first heating system so

Energy manager will perchase second system.

Here we can understand by illustration :-

First system standard efficiency is lower than second system.

Annual cost for first heating system is -

Total annual cost =Annual operating 4cost × no of years

$7,500 × 14 = $105,000

Total anual cost - discont

$105000 - $1,575 = $103,425

Total Annul cost + System cost = total paybel cost

$103,425+$9,500 = $112, 925

And for second heating system he have to pay

$4,700 × 14 = $65,800 = $70, 930

$65,800 - $9,870 = $55,930

$55,930 + $15,000 = $70,930.

$70930 is lower than $112,925

So energy manager will purchase second heating system.