Jannsen Limited is contemplating investing in solar panels to reduce its need to purchase electricity from its local hydro company.

Jannsen Limited is contemplating investing in solar panels to reduce its need to purchase electricity from its local hydro company. The panels are estimated to cost $2,000,000 and will have a 15-year useful life with no salvage value. The electricity cost savings are expected to be about $200,000 per year. Management expects there will be some intangible benefits arising from purchasing the solar panels such as increased goodwill among its younger customers who are, on average, environmentally conscious. This could lead to increased repeat business with these customers in the future. Jannsen uses a discount rate of 10% when evaluating capital expenditures.

Required:

1. Calculate the net present value of the investment in solar panels.

Expert Solution

The solar panel’s net present value without considering the intangible benefits would be:

Item	Year(s)	Amount of Cash Flows	Present Value of Cash Flows*
Cost of the equipment	Now	-$2,000,000	-$2,000,000
Annual cash savings	1-15	$200,000	$1,521,216
Net present value			-$478,784

*Calculated using NPV formula in Microsoft Excel and a 10% required return.

The net present value of the investment in solar panels is $478,784.

Renze Joy Candido answered 2 years ago

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