EGM 540: QUESTIONS-WEEK 5 &6 Q1. An owner them to last energy system system be u

Question

EGM 540: QUESTIONS-WEEK 5 &6 Q1. An owner them to last energy system system be used for the economic analysis of these two projects? of two existing commercial buildings is considering the possibility of retrofitting conservation. Both buildings are otherwise in good condition and are expected for another 30 years. Preliminary investigations indicate that technologically a solar with 25 years of useful life is most suitable for building 1, and a heat recovery with 18 years of useful life is most suitable for building 2. What planning horizon should for energy 2. Using a 10% interest rate, determine which alternative, if any, should be selected, based on net present worth. Alternative First Cost Uniform Annual Benefit Useful life S5,300 1,800 4 years $10,700 2,100 ears Q3. Projects X and Y have first costs of $6,500 and $17,000, respectively. Project X has net annual dentically benefits of $2,000 during each year of its 5-year useful life, after which it can be replaced i Project Y has net annual benefits of $3,000 during each year of its 10-year life. Use present worth analysis, and an interest rate of 10% to determine which project to select. Q4. An and B. If an 8% interest rate is used, recommend which device to be purchased? Devices engineering analysis by net present worth (NPW) is to be made for the purchase of two devices A Cost Uniform Salvage Useful Life Annual Benefit 100 100 ears Device P 600 250 Device Q 700 10

Explanation / Answer

Ans.1)

Bulding 1 -

Expected year to last = 30 years

Life of Solar energy system = 25 years

If, present cost of solar energy system is dollar 35000, then after 25 years it will cost to 35000 x 25 = 875000.

(approx we could take dollar 10 Lacs for the changes in prices with time time)

Henceforth, with economic perspective it could be used every where. Whether its a homes or offices or telecommunications.

Bulding 2 -

Expected year to last = 30 years

Life of Heat recovery system = 18 years

If, present cost of Heat recovery system is dollar 8000, then after18 years it will cost to 8000 x 18 = 144000.

The prices are being assumed.

Heat recovery system comes at much lower prices as compared to Solar energy system. Though, it is less costlier and would works for 7 years lesser than solar energy, it is wise to go with Building 1 projects. It is expensive but all facilities could be connected to it.

Ans.2)

In order to calculate the net present worth of each alternative, we need to first calculate the present value of the benefits accrued in different years. Next, we need to subtract the initial cost from the total present value of the annual benefits. The present value of cash flows can be calculated using the following formula:

PV = ((C1/(1+r)1) + ((C2/(1+r)2) + ((C3/(1+r)3) +…….+ ((Cn/(1+r)n)

In the formula, Cn refers to the cash flow in the nth period and r is the rate of interest per period.

For Alternative A, the total present value of the annual benefits = ((1800/(1+0.10)1) + ((1800/(1+0.10)2) + ((1800/(1+0.10)3) + ((1800/(1+0.10)4)

= $(1636.36 + 1487.60 + 1352.36 + 1229.42)

= $5705.74

After deducting the initial cost from the total present value of the annual benefits, we get the net present worth of alternative A = $5705.74 - $5,300 = $405.74

For Alternative B, the total present value of the annual benefits = ((2100/(1+0.10)1) + ((2100/(1+0.10)2) + ((2100/(1+0.10)3) +…….+ ((2100/(1+0.10)8)

= $(1909.09 + 1735.53 + 1577.76 + 1434.32 + 1303.93 + 1185.39 + 1077.63 + 979.66)

= $11,203.35

After deducting the initial cost from the total present value of the annual benefits, we get the net present worth of alternative A = $11,203.35 - $10,700 = $503.34

So, the net present worth of the alternative B is greater than that of alternative A. So the alternative B should be selected.

AQns.3)

Projetcs X and Y have first costs of $6500 and $17000 respectively. Project X has net annual benefits of $2000 during each year of its 5-year useful life.

Y has net annual benefits of $3000 during each year of its 10-year life.

interest rate=10%

applying net present worth (NPW) analysis it can be found out that which project is better.

For X,

NPWX=2000(P/A,10%,5)-6500-6500(P/F,10%,5)

          = 2000[(1+10)5-1]/[10(10+1)5]-6500-6500[(1+10)-5)

           = 199.999-6500-0.04

           = -6301.04

NPWY= 3000[(1+10)10-1]/[10(10+1)10]-17000-17000[(1+10)-10)

          = 300-17000-(6.55x10-07)

           = -16700

Ans.4)

Solution } Device A

Cost of asset = $600

Life span = 5 years

Salvage value = $250

So cost of device after salvage value = $600 - $250

=$350

Annual benfit over life span = $100 × 5 = $500

Cost benefit analysis = benefits - cost

= $500 - $350

=$150

Device B

Cost after salvage value = $700 - $180

=$520

Annual benefits over life span = $100 × 10 =$1000

Cost benefir analysis = benefits - cost

= $1000 - $520

=$480

So comparing both devices , cost benefit analysis device B is having more benefit of $480 which is more than benefit from device A ie $150, so device B is recomended.

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