A family is considering installing a household solar energysystem. The system has an installed cost...

A family is considering installing a household solar energy system. The system has an installed cost of $1,100 and they reduce the homeowner’s energy bill by$350 per year. The residual value of the solar panels is $360 at the end of their 5-year life. What is the annual effective IRR of this investment? Assume the family has a MARR of 10%. Please use the interpolation method.

Expert Solution

Let i% be the IRR, then as per given condition

350*(P/A,i%,5) + 360*(P/F,i%,5) = 1100

Dividing by 10

35*(P/A,i%,5) + 36*(P/F,i%,5) = 110

using trail and error method

When i = 23%, value of 35*(P/A,i%,5) + 36*(P/F,i%,5) = 35*2.803473 + 36*0.355201 = 110.908798

When i = 24%, value of 35*(P/A,i%,5) + 36*(P/F,i%,5) = 35*2.745384 + 36*0.341108 = 108.368333

using interpolation

i = 23% + (110.908798-110)/(110.908798-108.368333) * (24%-23%)

i = 23% + 0.3577%

i = 23.3577% ~ 23.36% (Approx)

Rahul Sunny answered 2 years ago

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