Question

QUESTION 7

1. Which has the greatest NPV assuming a 25 year planning horizon and MARR = 12%?

   		Install a $20,000 solar system that will last 25 years, and generate 38,000 kWh/year at $0.10/kWh.
   		Install a $25,000 Ground-Source Heat pump that will last 50 years and save $3,500/year.
   		Both options has equal NPV
   		Not possible to be calculated

Answer 1

We have given the values..

MARR = 12%

NPV in 25 years of both...?

NPV for both are same

PLAN A

Total installation cost = $20000

Generating 38000 kwh/year @ $.10/kwh. = $3800/year income

PLAN B

Total installation cost = $25000

life in years   = 50

savings in year = $3500

Formula for NPV

For finding NPV = (Cash flows)/( 1+r)i..

i- Initial Investment

Cash flows means = Cash flows in the time period

r = Discount rate

i = time period

with this equation we can understand that, value of NPV depends upon the Cashflow and denominator( 1+r)i. If the Cashflow is greater and product of the denominator value( 1+r) is less..,,greater the NPV..

We can see that..in installing solar system.. profit will be between ($3500 -- $3800),ie greater than Ground source heat pump.Besides these..time period is only 25 years. therfore product of denominator( 1+r)i is comparitievly less than Ground source heat pump.

THANKYOU..SIR/MADAM..Hope this helped you.