Question

Case Discussion Questions

LEGRAND 7

What are the appropriate incentives for Legrand to undertake an energy efficiency project?

Future regulations

Short payback periods

Long term savings

Pro Forma Model based on Lighting Projection

     1. Taxes are applied to avoided costs

     2. Annual energy increase is assumed to be 3 percent (see cell M12)

     3. Federal marginal tax rates of 35% are assumed (cell B21)

Assumptions

Lighting Investment (Gross)

$211,473

Duke Rebate per Fixture

$50.00

x # of Fixtures

938

=Duke Rebate

$46,900

Area of warehouse in sqft

330,000

x Per sqft deduction

$0.60

= Allowable Deduction

$198,000

Min of Allowable and Investment

$198,000

x Federal Tax Rate

35%

= 2005 Energy Policy Act Deduction

$69,300

Lighting Investment (Gross)

$211,473

+ Duke Rebate

$(46,900)

+ 2005 Energy Policy Act Deduction

$(69,300)

= Lighting Investment (Net Incentives)

$95,273

(A)

Standard Energy Use

Old System

New System

Hours per Day (6 am - 12 am)

18

9

x Days Per Week (Mon-Sat)

6

6

x Weeks per Year

52

52

Hours of Operation per Year

5,616

2,808

Watts per unit

456

147

/Watts per kW

1,000

1,000

x Units

938

938

= Kilowatts per hour

428

138

Hours of Operation

5,616

2,808

kW per hour

428

138

= kW consumed

2,402,120

387,184

Energy Avoided, yr. 1 (kWh/year)

Year 1 avoided energy cost/kWh

$0.06

(B)

Annual energy cost increase

3.0%

Carbon per kWh from grid (pounds)

1.8

/ pounds per ton

2,000

x Energy Avoided per Year (kWh/year)

2,014,937

(C)

x Years of Operation

20

= Tons of Carbon Avoided/ 20 years

36,269

1813.442904

Lighting Investment (Gross)

$211,473

/ Tons of Carbon Avoided

36,269

=$ per ton of Carbon Pre Incentive

$5.83

Lighting Investment (Net Incentives)

$95,273

/ Tons of Carbon Avoided

36,269

=$ per ton of Carbon Post Incentive

Pro Forma Analysis	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 12	Year 13	Year 14	Year 15	Year 16	Year 17	Year 18	Year 19	Year 20
Investment
Upgrade Cost Net of Incentives (A)	$95,273	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
running costs	150000	31361.89	32302.75	33271.83	34269.99	35298.09	36357.03	37447.74	38571.17	39728.31	40920.16	42147.76	43412.20	44714.56	46056.00	47437.68	48860.81	50326.63	51836.43	53391.53	54993.27
Avoided Costs
Avoided energy costs (B * C)	$0	$120,896	$124,523	$128,259	$132,107	$136,070	$140,152	$144,356	$148,687	$153,148	$157,742	$162,474	$167,349	$172,369	$177,540	$182,866	$188,352	$194,003	$199,823	$205,818	$211,992
Avoided cost of carbon credits	$0	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574	$10,574
Tax on avoided cost	$0	($46,014)	($47,284)	($48,591)	($49,938)	($51,325)	($52,754)	($54,226)	($55,741)	($57,302)	($58,911)	($60,567)	($62,273)	($64,030)	($65,840)	($67,704)	($69,624)	($71,602)	($73,639)	($75,737)	($77,898)
Total Avoided Costs	$0	$85,455	$87,813	$90,241	$92,742	$95,318	$97,972	$100,705	$103,519	$106,419	$109,405	$112,481	$115,649	$118,913	$122,274	$125,736	$129,302	$132,975	$136,758	$140,654	$144,668
Cash Flow	($245,273)	$54,094	$55,510	$56,969	$58,472	$60,020	$61,615	$63,257	$64,948	$66,691	$68,485	$70,333	$72,237	$74,198	$76,218	$78,298	$80,441	$82,648	$84,921	$87,263	$89,675
Cumulative cash flow	($245,273)	($191,179)	($135,669)	($78,700)	($20,228)	$39,792	$101,407	$164,663	$229,612	$296,302	$364,787	$435,121	$507,358	$581,556	$657,774	$736,073	$816,514	$899,162	$984,083	$1,071,346	$1,161,020
CASH FLOW (NO TRADING)	($245,273)	47,221	48,637	50,096	51,599	53,147	54,742	56,384	58,075	59,818	61,612	63,461	65,364	67,325	69,345	71,425	73,568	75,775	78,049	80,390	82,802
CUMUlative cash flow (No trading)		(198,052.4)	(149,415.1)	(99,318.8)	(47,719.5)	5,427.7	60,169.4	116,553.3	174,628.7	234,446.4	296,058.6	359,519.2	424,883.6	492,208.9	561,554.0	632,979.4	706,547.7	782,322.9	860,371.4	940,761.4	1,023,563.0
Annual Discount Rate	10%
NPV	$278,834	NPV (No carbon trading)	₹225,640.82
Net Price per Ton	($7.69)
IRR (no residual value)	with trading	no trading
5 year	5%	1%
7 year	20%	10%
10 year	23%	17%
20 year	24%	22%

$2.63

2,014,937

Answer 1

IRR of the project is high in long term.

For 10year term, the IRR is 23% with trading and 17% without trading.

For 20 year term IRR is 24% with trading and 22% without trading.

Cost of Capital is 10%

Payback period is more than 5 years since IRR for 5 year with trading is 5% which isles than cost of capital.

Hence, short payback period is not the incentive.

The project is giving good long term return. Hence future regulation is not the appropriate incentive. It may help in the decision as a complementary incentive.

The main incentives for Legrand to undertake the energy efficiency project is :

Long term savings