The energy efficiency project described in Problem 10-23 has a first cost of $15
ID: 2446418 • Letter: T
Question
The energy efficiency project described in Problem 10-23 has a first cost of $150,000, a life of 10 years, and no salvage value. Assume that the interest rate is 8%.
a) What is the equivalent uniform annual worth for the expected annual savings?
b) Compute the equivalent uniform annual worth for the pessimistic, most likely, and optimistic estimates of the annual savings. What is the expected value of the equivalent uniform annual worth?
c) Do the answers to (a) and (b) match? Why or why not?
(Problem #23: Annual savings due to an energy project have a most likely value of $30,000. The high estimate of $40,000 has a probability of .25 and the low estimate of $20,000 has a probability of .35.)
Explanation / Answer
C) Both answers in option (a) and (b) doesn't match because in option A, only likely profits are taken into consideration for calculation of Present value of net savings.
But in case B, worst estimate and like estimate are taken along with their probabilities of occurance, for calculation of present value of savings.
A) 1 2 3 4 5 6 7 8 9 10 Annual Saving 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 Less : Dep Cost 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 PV factor @8% 1.08 1.1664 1.259712 1.360489 1.469328 1.586874 1.713824 1.85093 1.999005 2.158925 PV 13889 12860 11907 11025 10209 9453 8752 8104 7504 6948 Expected Value of savings 100651 B) Earning Prob Earning 40000 0.25 10000 20000 0.35 7000 30000 0.40 12000 29000 1 2 3 4 5 6 7 8 9 10 Annual Saving 29000 29000 29000 29000 29000 29000 29000 29000 29000 29000 Less : Dep Cost 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 14000 14000 14000 14000 14000 14000 14000 14000 14000 14000 PV factor @8% 1.08 1.1664 1.259712 1.360489 1.469328 1.586874 1.713824 1.85093 1.999005 2.158925 PV 12963 12003 11114 10290 9528 8822 8169 7564 7003 6485 Expected Value of savings 93941$Related Questions
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