Question

An international company is economically evaluating to substitute an existing electrical water heater with an array of solar panels. The net installed investment cost of the panels is $1,650. Operating costs for this new technology will be $25 per month. Based on an energy audit, the existing electrical heater uses 21 kilowatt hours (kWh) of electricity per month at $0.15 per kWh. It has been estimated that starting from the beginning of third year, expenses will increase by $4 dollars every coming year for the next five years, after which the expenses will continue to increase by six dollars every coming year until the end of tenth year of the project lifetime. After that there is no operating costs, because of general maintenance, that will be provided for the coming years. The management believes that all this long maintenance service for the electrical heater will cost $250 and will be paid by the end of year 15. On the other hand, the solar panels disposal cost at the end of its 15 years of useful life will be $150.

a. Draw the cash flow diagram if the solar panels have a lifetime of 15 years?

b. What is AW of this project at MARR=6% if the solar panels have a lifetime of 15 years? Explain in your own words the meaning of AW for this project.

Answer 1

Answer :

Existing cost per year = 21*0.15*12 = 37.8

Cash flows table(Solar panels) :

Year	Cash flows(solar panels)
0	-1650
1	-300
2	-300
3	-304
4	-308
5	-312
6	-316
7	-320
8	-326
9	-332
10	-338
11	0
12	0
13	0
14	0
15	-250+150

Part b:

For Annual worth :

First calculate NPV =

n = 15, MARR = 6%

cash flows are already calculated above in the table

NPV = -$,3,999.47

Annual worth = -$ 411. 80

Formula AW = r (NPV) / ( 1 - (1 + r)^-n)