Technology Maturation. Green Futures operates a solar panel power generation fac

Question

Technology Maturation. Green Futures operates a solar panel power generation facility in Florida. The current field generates 10 million kilowatt hours per year, but every year production drops off by 1 million kilowatt hours, as dust and droppings accumulate on the panels. Replacing the panels right now with the newest technology panels will increase output to 15 million kilowatt hours, which will then also drop off by 1 million kilowatt hours per year. A new set of panels costs $1.5 million installed. In two years, an even newer panel will be available, with 18 million kilowatts output for only $1 million installed. Green futures sells electricity for $0.08 per kilowatt hour. When should the panels be upgraded? Do an analysis over the next 10 years. Use a discount rate of 18%.

Explanation / Answer

As the NPV of Option C (18 million kwh after 2 years) is the highest, the company should go for Option C.

Year Option A - No change Cashflow (A) Discounted CF A Option B Cashflow (B) Discounted Cashflow B Option C Cashflow C Discounted Cashflow C 0 10,000,000    800,000.00                   800,000    15,000,000     (300,000.00)                               (300,000) 10,000,000              800,000          800,000 1 9,000,000    720,000.00                   610,169 14,000,000          1,120,000                                 949,153 9,000,000              720,000          610,169 2 8,000,000    640,000.00                   459,638 13,000,000          1,040,000                                 746,912 18000000              440,000          316,001 3 7,000,000    560,000.00                   340,833 12,000,000              960,000                                 584,286 17,000,000          1,360,000          827,738 4 6,000,000    480,000.00                   247,579 11,000,000              880,000                                 453,894 16,000,000          1,280,000          660,210 5 5,000,000    400,000.00                   174,844 10,000,000              800,000                                 349,687 15,000,000          1,200,000          524,531 6 4,000,000    320,000.00                   118,538 9,000,000              720,000                                 266,711 14,000,000          1,120,000          414,883 7 3,000,000    240,000.00                     75,342 8,000,000              640,000                                 200,912 13,000,000          1,040,000          326,482 8 2,000,000    160,000.00                     42,566 7,000,000              560,000                                 148,981 12,000,000              960,000          255,397 9 1,000,000      80,000.00                     18,036 6,000,000              480,000                                 108,219 11,000,000              880,000          198,401 10 0                     -                                -   5,000,000              400,000                                   76,426 10,000,000              800,000          152,852 NPV               2,887,546                             3,585,180      5,086,664

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