The annual savings from installing the new lighting system $ A certain factory b

Question

The annual savings from installing the new lighting system $

A certain factory building has an old lighting system. Lighting the building currently costs, on average, $22,000 a year. A lighting consultant tells the factory supervisor that the lighting bill can be reduced to $6,000 a year if $53,000 is invested in new lighting in the building. If the new lighting system is installed, an incremental maintenance cost of $3,000 per year must be taken into account. The new lighting system has zero salvage value at the end of its life. If the old lighting system also has zero salvage value, and the new lighting system is estimated to have a life of 20 years, what is the net annual benefit for this investment in new lighting? Take the MARR to be 12%. Assume the old lighting system will last 20 years.

Explanation / Answer

Net annual savings = 22,000 - 6,000 - 3,000 = 13,000

Present value of these savings for 20 years with MARR = 12% is

PV = 13,000 x 7,4694 = 97,103

NPV = 97,103 - 53,000 = 44,103

Net Annual Benefit = 44,103 / 7.4694 = $5,904.46

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