Question

Company XYZ is considering to replace an existing electrical water heater with an array of solar panels. The net installed investment cost of the panels is $1,350. Based on an energy audit, the existing water heater uses 210 kilowatt hours (kWh) of electricity per month at $0.15 per kWh. It has been estimated that starting from the end of year three, expenses will increase by five dollars every coming year for the next five years, after which the costs will continue to increase by six dollars every coming year until the end of the project lifetime.

a. What is the IRR of this investment if the solar panels have a lifetime of 12 years?

b. What is AW of this project at MARR=6%?

c. Explain and justify your answers of a. and b. using your words

Answer 1

Based on the given data, pls find below steps, workings and answers:

a. What is the IRR of this investment if the solar panels have a lifetime of 12 years? Answer: IRR is 26.98%

b. What is AW of this project at MARR=6%? Answer: AW of this Project is $ 233.32

c. Explain and justify your answers of a. and b. using your words; Answer: Based on the IRR , NPV and the AW of the project, it is recommended for this project; IRR is higher than that of the MARR and NPV is positive and AW of positive $ 233.32 per year;

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;