Question

Introduction：

Vanke (SEHK:2202) is one of the largest owners and managers of Class A office spaces in

the growing innovation hubs of Shenzhen.1 Project manager Natalie Yang is in the midst of

overseeing renovations of Vanke’s Horizontal Skyscraper. Among the long lists of upgrades

Natalie has specified, modern recessed lighting throughout the property is sure to be a huge

hit. All the fixtures have already been installed. Natalie just has to decide between halogen

or LED bulbs. Natalie estimates that installing halogen bulbs would cost roughly $5 per bulb

while LED bulbs would be substantially more costly at roughly $30 per bulb. The Horizontal

Skyscraper is 128,000 square meters and has 1 recessed light for every 16 square meter, so the

total increase in cost from using LEDs is $200,000, a large amount given this is just for light

bulbs. However, Natalie thinks the extra costs might just be worth it because LED bulbs last

nearly 16 times as long as halogens. Your task is to help Natalie use the concept of Net Present

Value to decide which type of bulb to use. Use the following assumptions:

• Halogen bulb expected lamp life: 3000 hours

• LED bulb expected lamp life: 48,000 hours

• Lights operate: 12 hours a day 250 Days a year

• Halogen bulb price stays constant for foreseeable future

• After 16 years, the light fixtures will be replaced, i.e., no need to include in your calcula-

tions anything that happens after year 16

• Interest Rate: 5%

Questions

1. What type of light bulb should Natalie Choose?

2. What are the cost savings (in present value terms) of your recommendations relative to

the alternative?

3. What type of light bulb should Natalie choose if the interest rate is 15%?

Answer 1

PART 1

Total bulbs required is 128000/16 = 8000 bulbs

Hrs used in a year per bulb is 12*250 = 3000 hrs

Cost of halogen bulb is 5. Therefore total cost is 40000 per year for 16 years i.e. 640000.

Cost of LED Bulb is 30.Therefore cost is 240000 but it will work for 16 years so total cost is 240000.

Present value formula is 1/(1+r)^n + 1/(1+r)^n+1.....

where r is interest rate and n is number of years

Now calculating the Present vale of halogen bulbs we get 433510.

Therefore, Natalie should choose LED Bulbs.

PART 2

Cost saving for using LED bulbs instead of halogen bulbs is 433510-240000 = 193510

PART 3

If the interest rate is 15% then present value of halogen bulb will be 238170.

In this case it will be beneficial for Natalie to use halogen bulbs as there will be cost saving of 1830.