Question

CASHFLOWS

A waste management company is considering powering a temporary waste disposal site in a remotr area by either solar panels or constructing an abovr ground electric line to the fwcility and using conventional power

Solar panels will cost $20,000 to install and will have a useful life of 6yrs with no salvage value. Annual cost for inspection, cleaning, etc. is expected to be $5,000 for first 3 years and $7,000 for last 3 years.

Solar panels are tax free.

A new power line will cost $100,000 to install, with power costs expected to be $1000 per year for the first 2 years, $ 800 for years 3 and 4 and $600 for year 5 and $400 for year 6. Since the site is temporary, it will be abandoned in 6 years. It will cost $ 5000 to dismantle the power lines but the waste can be sold for a salvage value of $6000.

If interest rate is expected to be between 8% per year throughout the project life, which alternative should be selected?

Answer 1

ALTERNATIVE 1: SOLAR PANELS

ALTERNATIVE 2 : POWER LINE

ALTERNATIVE 1: SOLAR PANELS

Initial cost = $20,000

useful life = 6 years

Salvage value = Nil

Expected Interest rate = 8 % per year

Expected interest rate will be treated as present value factor (PVF)

Annual cost for inspection, cleaning etc. is expected to be $5,000 for first 3 years and $ 7,000for last 3 years

calculate the present worth of project

year	cash flow	PVF @8%	PV of cash flow
0	-20,000	-	-20,000
1	-5,000	0.9259	-4629.5
2	-5,000	0.8573	-4286.5
3	-5,000	0.7938	-3969.0
4	-7,000	0.7350	-5145.0
5	-7,000	0.6806	-4764.2
6	-7,000	0.6302	-4411.4
	Total		-47,205.6

ALTERNATIVE 2: POWER LINE

Initial cost = $100,000

useful life = 6 years

Salvage value =$6000

however, It will cost $5,000 to dismantle the power line

Net cash inflow after removal of power line = $6,000- $5,000 = $1,000

Expected Interest rate = 8 % per year

Expected interest rate will be treated as present value factor (PVF)

Annual power cost expected to be $1000 for first 2 years ,$800 for year 3 and 4 and $600 for year 5 and $400 for year 6.

calculate the present worth of project

year	cash flow	PVF @8%	PV of cash flow
0	-100,000	-	-100,000
1	-1,000	0.9259	-925.9
2	-1,000	0.8573	-857.3
3	-800	0.7938	-635.04
4	-800	0.7350	-588.0
5	-600	0.6806	-408.36
6	-400	0.6302	-252.08
	1,000 (Inflow as mentioned above)	0.6302	630.2
	Total		-103,036.48

CONCLUSION

PV of Cash outflow of  Alternative 1 = $47,205.6

PV of Cash outflow of  Alternative 2 = $103,036.5

Alternative 1 (Solar Panel) should be selected because it has lower cash outflow.

THANK YOU !