Question

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2 alternatives for an off-grid energy system are being compared by a company building a house in New Mexico (From Providers A and B). Alternative A is a solar energy system that has a life of 8 years, the first cost of $18,000, annual energy cost savings (can be treated as revenue in this cash flow) of $2600, and a salvage value after 8 years of $9000. Alternative B is a wind energy system that has a life of 12 years, with an initial cost of $21,500, annual energy cost savings of $3200, and a salvage value after 12 years of $9000. MARR is 7%, and alternatives are replicable in the future. Using an appropriate method of analysis, choose the better alternative. Show calculation steps leading to this choice and provide explanations whenever possible.

Answer 1

Equal Annual net present value(EANPV) approach evaluates unequal-lived projects that converts the net present value of unequal-lived mutually exclusive projects into an equivalent (in NPV terms) annual amount.

EANPV = Net present value of the project/PV of annuity corresponding to life of the project at given cost of capital

Calculation of EANPV of provider A-

EANPV = 2763.46/5.9713

= $ 462.79

Calculation of EANPV of provider B-

EANPV = 7912.70/7.9427

= $ 996.22

on the basis of EANPV, provide B becomes more desirable, with higher EANPV. in fact, acceptance of provider B would be a right decision.

present value of $ 1 table used-

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