Question

In: Economics

Green Futures operates a solar panel power generation facility in Scottsboro, Alabama. The current field generates...

Green Futures operates a solar panel power generation facility in Scottsboro, Alabama. The current field generates 15 million kilowatt-hours per year, but every year production drops off by 1 million kilowatt-hours, as dust and droppings accumulate on the panels. Replacing the panels right now with the newest technology panels will increase output to 25 million kilowatt-hours, which will then also drop off by 1 million kilowatt-hours per year. A new set of panels costs $1.2 million installed. In two years, an even newer panel will be available, with 30 million kilowatts output for only $1 million installed, these drop off in power each year just like the other panels. Green Futures sells electricity for $0.10 per kilowatt-hour. When should the panels be upgraded Do an analysis of the next 10 years? Use a discount rate of 17%.

Solutions

Expert Solution

Herein, the NPV will be calculated under three scenarios as under:
a. Existing plant is continued for 10 years.
b. A second plant is installed at $1.2 million installation charge.
c. Exiisting plant worked for the first two years and at the end of the second year, a third plant is installed at $1.2 million, which will be generating power from the third year.

Calculation of cash flows and their present values are shown as under:

As per the calculations of analysis done under, The panel must be replaced after two years as its NPV is the highest thus, profitable.

Workings:


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