I need help with probelm pleasse I am stuck 4. Suppose that university regulatio

Question

I need help with probelm pleasse I am stuck

4. Suppose that university regulations are proposed requiring a new dorm facilities utilize solar energy for water heating. A new dorm facility is being built and two hybrid water heating systems that utilize solar to supplement natural gas heating. Option 1 is based on double glazed flat plate collectors and Option 2 uses evacuated tubular collectors. Both options have a useful life of 20 years. Pertinent data is listed in the table below. Option 1 Option 2 $2,700,000 $3,200,000 Capital Cost $50,000 $80,000 Annual Maintenance Cost Anticipated Fuel Savings $600,000 $560,000 Assuming an interest rate of 10%, which option is preferred?

Explanation / Answer

Option 1

Annual cash flows=600000-50000=550000

NPV=-3200000+550000/1.10^1+550000/1.10^2+550000/1.10^3+550000/1.10^4+550000/1.10^5+550000/1.10^6+550000/1.10^7+550000/1.10^8+550000/1.10^9+550000/1.10^10+550000/1.10^11+550000/1.10^12+550000/1.10^13+550000/1.10^14+550000/1.10^15+550000/1.10^16+550000/1.10^17+550000/1.10^18+550000/1.10^19+550000/1.10^20

=1482460

Option 2

Annual cash flows=560000-80000=480000

NPV=-2700000+480000/1.1^1+480000/1.1^2+480000/1.1^3+480000/1.1^4+480000/1.1^5+480000/1.1^6+480000/1.1^7+480000/1.1^8+480000/1.1^9+480000/1.1^10+480000/1.1^11+480000/1.1^12+480000/1.1^13+480000/1.1^14+480000/1.1^15+480000/1.1^16+480000/1.1^17+480000/1.1^18+480000/1.1^19+480000/1.1^20

=1386511

Option A will have higher NPV, thus preferred

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