Two methods can be used to produce solar panels for electric power generation. M
ID: 1141338 • Letter: T
Question
Two methods can be used to produce solar panels for electric power generation. Method 1 will have an initial cost of $700,000, an AOC of $170,000 per year, and $125,000 salvage value after its 3-year life. Method 2 will cost $830,000 with an AOC of $125,000 and a $150,000 salvage value after its 5-year life. Assume your boss asked you to determine which method is better, but she wants the analysis done over a three-year planning period. You estimate the salvage value of Method 2 will be 35% higher after three years than it is after five years. If the MARR is 12% per year, which method should the company select? The company should selec (Click to select) method 2 method 1Explanation / Answer
Method 1
Method2
Initial Investment
700,000
830,000
AOC
170,000
125,000
Salvage Value
125,000
150,000
Life
3 years
5 years
The company is taking a study period of 3 years for the evaluation purpose. In this case the salvage value of Method 2 will be 35% higher after three years than it is after five years.
MARR = 12%
Since method of evaluation is not give, use the present worth method.
New cash flows are
Method 1
Method2
Initial Investment
700,000
830,000
AOC
170,000
125,000
Salvage Value
125,000
150,000 + 35% of 150,000
= 202,500
Life
3 years
3 years
Present Worth
=700,000 + 170,000 (P/A, 12%, 3) – 125,000 (P/F, 12%, 3)
Present Worth
=700,000 + 170,000 (2.4018) – 125,000 (0.7118)
=1,019,368.5
Present Worth
=830,000 + 125,000 (P/A, 12%, 3) – 202,500 (P/F, 12%, 3)
Present Worth
=830,000 + 125,000 (2.4018) – 202,500 (0.7118)
= 986,085.5
On the basis of the above calculations, Method 2 is more economical. As both the methods are cost dominated and we need to select the method 2 as it has less present worth or less cost.
Method 1
Method2
Initial Investment
700,000
830,000
AOC
170,000
125,000
Salvage Value
125,000
150,000
Life
3 years
5 years
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