Question

Two options are considered to power a new factory located in a rural area, a small-scale solar farm, or a new power-line.

Solar cells will cost $16,600 to install. Annual costs for inspection are expected to be $2,400.

A new power line will cost $31,000 to install, with power costs expected to be $1,000 per year.

Assume mutually exclusive projects, and both projects have a useful life of 5 years with no salvage value. At an interest rate of 10% per year, which alternative should be selected on the basis of an annual worth analysis?

A. Power Line

B. Solar farm

C. None of the above

D. Both options

Answer 1

Equivalent annual cost of Solar cells = 16600*(A/P,10%,5) + 2400

= 16600*0.263797 + 2400

= 6779.03

Equivalent annual cost of Power line = 31000*(A/P,10%,5) + 1000

= 31000*0.263797 + 1000

= 9177.70

As Equivalent annual cost of Solar cells is less, solar Farms should be selected