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

Question

4. Technology Maturation.

Green Futures operates a solar panel power generation facility in Scottsboro, Alabama. The current field generates 12 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 20 million kilowatt-hours, which will then also drop off by 1 million kilowatt hours per year. A new set of panels costs $1 million installed. In two years, an even newer panel will be available, with 25 million kilowatts output for only $0.9 million installed. Green futures sells electricity for $0.09 per kilowatt hour. When should the panels be upgraded? Do an analysis of the next 10 years. Use a discount rate of 17%

Explanation / Answer

The analyses are as follows.

NOTE: If the new system is installed after 2 years, annual production is assumed to remain unchanged at 25 million KWH every year, since any annual decrease in production has not been stated.

Based on above analysis, NPV is higher if the new panel is installed after 2 years, than the NPV if it is installed now. So, upgradation should be done after 2 years.

IF NEW SYSTEM IS INSTALLED NOW Year Installation Cost ($) Current Production (KW) Revised Production (KW) Incremental Production (KW) Incremental Cash Flow($) Discount Factor @17% Discounted Incremental Cash Flow ($) 0 -10,00,000 120,00,000 200,00,000 80,00,000 -2,80,000 1.0000 -2,80,000 1 110,00,000 190,00,000 80,00,000 7,20,000 0.8547 6,15,385 2 100,00,000 180,00,000 80,00,000 7,20,000 0.7305 5,25,970 3 90,00,000 170,00,000 80,00,000 7,20,000 0.6244 4,49,547 4 80,00,000 160,00,000 80,00,000 7,20,000 0.5337 3,84,228 5 70,00,000 150,00,000 80,00,000 7,20,000 0.4561 3,28,400 6 60,00,000 140,00,000 80,00,000 7,20,000 0.3898 2,80,684 7 50,00,000 130,00,000 80,00,000 7,20,000 0.3332 2,39,901 8 40,00,000 120,00,000 80,00,000 7,20,000 0.2848 2,05,043 9 30,00,000 110,00,000 80,00,000 7,20,000 0.2434 1,75,251 10 20,00,000 100,00,000 80,00,000 7,20,000 0.2080 1,49,787 NPV 30,74,195

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