Technology Maturation. Green Futures operates a solar panel power generation fac
ID: 1169535 • Letter: T
Question
Technology Maturation. Green Futures operates a solar panel power generation facility in Florence, Alabama. 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
replacing the panel right now
output over 10 years will be like this 15, 14,13 12, 11, 10,9, 8,7, and 6 million kilowatt
and when replaced the output of current field or output sacrificied will be opportunity cost
new panel cost= $1.5 miilion
and price of killowatt hour= $0.08 per killowatt hour
net benefit of new panel= preent value of new output stream - present value of old output stream over period of ten yers- cost of new panel
= 15* 0.08 /(1+ .18) + 14*0.08/(1+.18)2 + .....6*0.08/(1+.18)10 - {10*0.08/(1+.18) + 9*0.08/(1+0.18)2+.... 1*0.08/(1+.18)10 } - 1.5
= $ 0.29 million
if not replaced now, another panel will be available in two years that means for 2 years old or current panel will be used then replaced with new one
for first two years production is going to be same in this case as panel is to be replaced after 2 years
using same formula
net benefit of new panel= preent value of new output stream - present value of old output stream over period of ten yers- cost of new panel
=10* 0.08 /(1+ .18) + 9*0.08/(1+.18)2 + 18 *0.08/(1+1.18)3 .....11*0.08/(1+.18)10 - {10*0.08/(1+.18) + 9*0.08/(1+0.18)2+.... 1*0.08/(1+.18)10 } - 1
=$ 1.34 million
on the basis of cost benefit analysis it is profitable to replace panel after 2 years instead of now, net benfit is more in 2 nd case
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