Two methods can be used to produce solar panels for electric power generation. M

Question

Two methods can be used to produce solar panels for electric power generation. Method 1 will have an initial cost of $740,000, an AOC of $190,000 per year, and $135,000 salvage value after its 3-year life. Method 2 will cost $870,000 with AOC of $135,000 and a $170,000 salvage value after its 5-year life. Assume your boss asked you to determine which method is better, but she wants the analysis done over a three-year planning period. You estimate the salvage value of Method 2 will be 37% higher after three years than it is after five years. If the MARR is 14% per year, which method should the company select? The company should select_____

Explanation / Answer

Method 1 Total Cost-Benefit Present Value=740000+190000/1.14+190000/1.14^2+190000/1.14^3-135000/1.14^3=1089988.93

Method 2 Total Cost-Benefit Present Value=870000+135000/1.14+135000/1.14^2+135000/1.14^3-170000*1.37/1.14^3=1026219.458

As method 2 has lwoer cost, method 2 should be selected

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