Question

Question 1

A new production system for a factory is to be purchased and installed for $142,299. This system will save approximately 300,000 kWh of electric power each year for a 6-year period. Assume the cost of electricity is $0.10 per kWh, and factory MARR is 15% per year, and the salvage value of the system will be $9,077 at year 6. Using the PW method to analyzes if this investment is economically justified

A- calculate the PW of the above investment and insert the result below.

Answer 1

Answer

The Present worth has been calculated as follows:

1. Calculate PW of yearly savings

PV Annuity​ = C × [1−(1+i)−n​]​ / i

where, C= Costy of electricity saved every year

i = MARR

n = Number of years

Plugging the same numbers as above into the equation, here is the result:

PV Annuity​ = 300000* 0.10 × [1−(1+.15)−6​]​ / 0.15

= $113,534.5

2. Calculate Present Worth of the Salvage Amount

PV = FV/(1+r)n

PV = Present value, also known as present discounted value, is the value on a given date of a payment.
FV = This is the projected amount of money in the future
r = the periodic rate of return, interest or inflation rate, also known as the discounting rate.
n = number of years

Thus, PV = 9077 / (1.15)6

= $3924.2

Thus, the PW of the above investment = Present Worth of Salvage Value + Present Worth of yearly savings

= 3924.2 + 113,534.5

= $117458.74