Question

A remotely located air sampling station can be powered by solar cells or by running an above ground electric line to the site and using conventional power. Solar cells will cost $17,200 to install and will have a useful life of 5 years with no salvage value. Annual costs for inspection, cleaning, and other maintenance issues are expected to be $2,500. A new power line will cost $33,500 to install, with power costs expected to be $1,000 per year. Since the air sampling project will end in 5 years, the salvage value of the line is considered to be zero. NOTE: This is a multi-part question. Once an answer is submitted, you will be unable to return to this part.

At an interest rate of 10% per year and using an AW analysis, what must be the first cost of the above ground line to make the two alternatives equally attractive economically? The first cost of the above ground line to make the two alternatives equally attractive economically is $−

Answer 1

AW of solar cells = -17200*(A/P,10%,5) - 2500

= -17200*0.263797 - 2500

= -7037.31

Let first cost of power line be P, then

AW of power line = -P*(A/P,10%,5) - 1000

= -P*0.263797 - 1000

As per given condition

-P*0.263797 - 1000 = -7037.31

P = (7037.31 - 1000)/0.263797 = 22886.20 ~ 22886