In: Finance
Compact fluorescent lamps (CFLs) have become required in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent lightbulb costs $.36 and lasts for 1,000 hours. A 15-watt CFL, which provides the same light, costs $2.95 and lasts for 12,000 hours. A kilowatt-hour is 1,000 watts for 1 hour. Suppose you have a residence with a lot of incandescent bulbs that are used on average 500 hours a year. The average bulb will be about halfway through its life, so it will have 500 hours remaining (and you can’t tell which bulbs are older or newer). If you require a 11 percent return, at what cost per kilowatt-hour does it make sense to replace your incandescent bulbs today?
(Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.)
Break-even cost $?
Existing Bulb:(incandescent ) | ||||||||
Life remaining of bulb=500 hours | ||||||||
Average life of a bulb=1000 hours | ||||||||
Cost of bulb =$0.36 | ||||||||
Capital cost of remaining life=0.36/2= | $0.18 | |||||||
Cost of CFL bulb | $2.95 | |||||||
Total initial cost for replacement | $3.13 | |||||||
Life of CFL bulb in hours | 12000 | |||||||
Number of years of use =(12000/500) | 24 | |||||||
Present Value of savings of $1 per year for 24 years at 11% discount | $8.35 | (Using PV function of excel with Rate=11%,Nper=24, Pmt=-1$,) | ||||||
Required present value of savings to break even | $3.13 | |||||||
Required annual savings in dollar | 0.37493397 | (3.13/8.35) | 0.37493397 | |||||
Saving in electricity per year per bulb=(60-15)*500 Watt Hour | 22500 | Watt hour | 22500 | |||||
Saving in electricity per year= | 22.5 | Killowatt hour | (22500/1000) | |||||
Assume Breakeven cost per killowatt hour= X | ||||||||
Annual savings=22.5X=0.37493397 | ||||||||
X=0.374934/22.5= | 0.016664 | Dollar per Killowatt hour | ||||||
Cost per kilowatt-hour that makes sense to replace incandescent bulbs today | 0.016664 | Dollar per Killowatt hour | ||||||
Cost per kilowatt-hour that makes sense to replace incandescent bulbs today(Rounded to nearest cent) | $ 0.02 | Dollar per Killowatt hour | ||||||
Breakeven Annual Cost =(15watts*500 hours*0.016664)/1000 | 0.124978 | dollar | ||||||
Breakeven Annual Cost per bulb(Rounded to nearest cent) | $ 0.12 | |||||||