You own a small factory in Ontario with a roof that is suitable for installing s
ID: 2369919 • Letter: Y
Question
You own a small factory in Ontario with a roof that is suitable for installing solar panels. Under the new feed-in tariff brought in under Ontario's Green Energy Act, managed by the Ontario Power Authority (OPA), power that is produced by designated clean technologies will be eligible for earning from any energy that is not used and is supplied to the electrical grid. OPA pays the supplier $0/802 for each kilowatt-hour of clean electrical energy. You estimate that the system for your factory will have a net output to the electrical grid of 11,930kWh/year. Your minimum acceptable rate of return is 10%
a. Calculate the annual benefit from the system before interest, taxes, and depreciation ( that is, you do not have to include these in your calculations).
You have two options. In option A, the installation cost is $60,500.00. There is an annual maintenance cost that is estimated to be 1.3% of the original installation cost at the end of year1. This annual maintenance cost is not constant; it grows each year by 2%. In option B, the installation cost is $73,500.00, but this cost includes regular maintenance over the twenty-year life of the system with no extra costs.
b. For an installation at the end of year 0, find the before tax cash flow series representing each of the two options
from 0 to 20 years option A and B
c. Determine the NPV ( net present value ) at MARR and the IRR( internal Rate of return) calculated as a percent, to one decimal place, for each of the two options; and enter the numbers in the table below. Also find the incremental internal rate of return, if appropriate.
Option Option
A B
NPV ______ ________
IRR ______ ________ IIRR_______
d Find in which year the payback occurs for each case.
Option Option
A B
simple
payback ____ ______
Discounted
Payback
@MARR ____ ______
e Based on this analysis, which option do you decide to implement ? Why?
f. One of your engineers informs you that the system supplier has changed the terms for Option B, and will only provide maintenance coverage for fifteen years. For this reason, you decide to use an expected life for the installation of only fifteen years (not twenty years as originally estimated) The comptroller (head accountant) tell you to use the same MARR: 10 %. All other factors remain the same. Recalculate the NPVs, IRRs and IIRR, if approprate.
Option Option
A B
NPV ____ _____
IRR ____ _____ IIRR ______
Explain in one or two sentences whether this new information would affect your decision.
Explanation / Answer
Option Option A B NPV ______ ________ IRR ______ ________ IIRR_______ A B simple payback ____ ______ Discounted Payback @MARR ____ ______ Option Option A B NPV ____ _____ IRR ___ _____ IIRR ______
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