Chapter 12, Problem 12.23AE

Calculate the payback and NPV for a sustainable energy project (Learning Objectives 1 & 3)

SUSTAINABILITY

Grant Industries is evaluating whether to invest in solar panels to provide some of the electrical needs of its main office building in Buffalo, New York. The solar panel project would cost $600,000 and would provide cost savings in its utility bills of $50,000 per year. It is anticipated that the solar panels would have a life of 20 years and would have no residual value.

Requirements

1. 1. Calculate the payback period in years of the solar panel project.
2. 2. If the company uses a discount rate of 12%, what is the net present value of this project?
3. 3. If the company has a rule that no projects will be undertaken that have a payback period of more than five years, would this investment be accepted? If not, what arguments could the energy manager make to try to obtain approval for the solar panel project?
4. 4. What would you do if you were in charge of approving capital investment proposals?