Engineering Economic Analysis
Engineering Economic Analysis
13th Edition
ISBN: 9780190296902
Author: Donald G. Newnan, Ted G. Eschenbach, Jerome P. Lavelle
Publisher: Oxford University Press
Question
Book Icon
Chapter 5, Problem 100P
To determine

Which of the alternatives is preferable.

Expert Solution & Answer
Check Mark

Answer to Problem 100P

The option to be selected is Solar Collector Field, since it results in a higher overall cash inflow over a period of 20 years.

Explanation of Solution

Given information:

Installation Cost:

Flat Solar Panels$87 Million

Mechanized Solar Panels $101 Million

Solar Collector Field $91 Million

Annual Operation and Maintenance costs (year 1):

Flat Solar Panels $2 Million

Mechanized Solar Panels $2.3 Million

Solar Collector Field $3 Million

Increase in Annual Operation and Maintenance costs (year 2 onwards):

Flat Solar Panels $250,000

Mechanized Solar Panels $300,000

Solar Collector Field $350,000

Annual Revenues in the form of Electricity

Flat Solar Panels $6.9 Million

Mechanized Solar Panels $8.8 Million

Solar Collector Field $9.7 Million

Annual Increase in Revenues:

Flat Solar Panels8%

Mechanized Solar Panels 8%

Solar Collector Field 8%

Useful Life: 20 Years

Rate of Interest for calculation: 10%.

Based on the above information, the following tables outlines the net present value calculation of the three options:

Flat Solar Panels:

Year Cash Flows Cash Inflows Cash Flows Cash Outflows Net Cash Flows P.V. @10% Amount
0 Electricity Benefits $ - Initial Cost $ 87,000,000.00 $ (87,000,000.00) 1 $ (87,000,000.00)
1 Electricity Benefits $6,900,000.00 Operating Costs $ 2,000,000.00 $ 4,900,000.00 0.9091 $ 4,454,590.00
2 Electricity Benefits (8% higher than last year) $7,452,000.00 Operating Costs($250,000 higher than previous year) $ 2,250,000.00 $ 5,202,000.00 0.8264 $ 4,298,932.80
3 Electricity Benefits (8% higher than last year) $8,048,160.00 Operating Costs($250,000 higher than previous year) $ 2,500,000.00 $ 5,548,160.00 0.7513 $ 4,168,332.61
4 Electricity Benefits (8% higher than last year) $8,692,012.80 Operating Costs($250,000 higher than previous year) $ 2,750,000.00 $ 5,942,012.80 0.683 $ 4,058,394.74
5 Electricity Benefits (8% higher than last year) $9,387,373.82 Operating Costs($250,000 higher than previous year) $ 3,000,000.00 $ 6,387,373.82 0.6209 $ 3,965,920.41
6 Electricity Benefits (8% higher than last year) $ 10,138,363.73 Operating Costs($250,000 higher than previous year) $ 3,250,000.00 $ 6,888,363.73 0.5645 $ 3,888,481.33
7 Electricity Benefits (8% higher than last year) $ 10,949,432.83 Operating Costs($250,000 higher than previous year) $ 3,500,000.00 $ 7,449,432.83 0.5132 $ 3,823,048.93
8 Electricity Benefits (8% higher than last year) $ 11,825,387.45 Operating Costs($250,000 higher than previous year) $ 3,750,000.00 $ 8,075,387.45 0.4665 $ 3,767,168.25
9 Electricity Benefits (8% higher than last year) $ 12,771,418.45 Operating Costs($250,000 higher than previous year) $ 4,000,000.00 $ 8,771,418.45 0.4241 $ 3,719,958.57
10 Electricity Benefits (8% higher than last year) $ 13,793,131.93 Operating Costs($250,000 higher than previous year) $ 4,250,000.00 $ 9,543,131.93 0.3855 $ 3,678,877.36
11 Electricity Benefits (8% higher than last year) $ 14,896,582.48 Operating Costs($250,000 higher than previous year) $ 4,500,000.00 $ 10,396,582.48 0.3505 $ 3,644,002.16
12 Electricity Benefits (8% higher than last year) $ 16,088,309.08 Operating Costs($250,000 higher than previous year) $ 4,750,000.00 $ 11,338,309.08 0.3186 $ 3,612,385.27
13 Electricity Benefits (8% higher than last year) $ 17,375,373.81 Operating Costs($250,000 higher than previous year) $ 5,000,000.00 $ 12,375,373.81 0.2897 $ 3,585,145.79
14 Electricity Benefits (8% higher than last year) $ 18,765,403.71 Operating Costs($250,000 higher than previous year) $ 5,250,000.00 $ 13,515,403.71 0.2633 $ 3,558,605.80
15 Electricity Benefits (8% higher than last year) $ 20,266,636.01 Operating Costs($250,000 higher than previous year) $ 5,500,000.00 $ 14,766,636.01 0.2394 $ 3,535,132.66
16 Electricity Benefits (8% higher than last year) $ 21,887,966.89 Operating Costs($250,000 higher than previous year) $ 5,750,000.00 $ 16,137,966.89 0.2176 $ 3,511,621.59
17 Electricity Benefits (8% higher than last year) $ 23,639,004.24 Operating Costs($250,000 higher than previous year) $ 6,000,000.00 $ 17,639,004.24 0.1978 $ 3,488,995.04
18 Electricity Benefits (8% higher than last year) $ 25,530,124.58 Operating Costs($250,000 higher than previous year) $ 6,250,000.00 $ 19,280,124.58 0.1799 $ 3,468,494.41
19 Electricity Benefits (8% higher than last year) $ 27,572,534.54 Operating Costs($250,000 higher than previous year) $ 6,500,000.00 $ 21,072,534.54 0.1635 $ 3,445,359.40
20 Electricity Benefits (8% higher than last year) $ 29,778,337.31 Operating Costs($250,000 higher than previous year) $ 6,750,000.00 $ 23,028,337.31 0.1486 $ 3,422,010.92
Net Present Value $ (11,904,541.97)

Mechanized Solar Panels:

Year Cash Flows Cash Inflows Cash Flows Cash Outflows Net Cash Flows P.V. @10% Amount
0 Electricity Benefits $ - Initial Cost $ 101,000,000.00 $ (101,000,000.00) 1 $ (101,000,000.00)
1 Electricity Benefits (8% higher than last year) $ 8,800,000.00 Operating Costs $ 2,300,000.00 $ 6,500,000.00 0.9091 $ 5,909,150.00
2 Electricity Benefits (8% higher than last year) $ 9,504,000.00 Operating Costs($300,000 higher than previous year) $ 2,600,000.00 $ 6,904,000.00 0.8264 $ 5,705,465.60
3 Electricity Benefits (8% higher than last year) $ 10,264,320.00 Operating Costs($300,000 higher than previous year) $ 2,900,000.00 $ 7,364,320.00 0.7513 $ 5,532,813.62
4 Electricity Benefits (8% higher than last year) $ 11,085,465.60 Operating Costs($300,000 higher than previous year) $ 3,200,000.00 $ 7,885,465.60 0.683 $ 5,385,773.00
5 Electricity Benefits (8% higher than last year) $ 11,972,302.85 Operating Costs($300,000 higher than previous year) $ 3,500,000.00 $ 8,472,302.85 0.6209 $ 5,260,452.84
6 Electricity Benefits (8% higher than last year) $ 12,930,087.08 Operating Costs($300,000 higher than previous year) $ 3,800,000.00 $ 9,130,087.08 0.5645 $ 5,153,934.15
7 Electricity Benefits (8% higher than last year) $ 13,964,494.04 Operating Costs($300,000 higher than previous year) $ 4,100,000.00 $ 9,864,494.04 0.5132 $ 5,062,458.34
8 Electricity Benefits (8% higher than last year) $ 15,081,653.57 Operating Costs($300,000 higher than previous year) $ 4,400,000.00 $ 10,681,653.57 0.4665 $ 4,982,991.39
9 Electricity Benefits (8% higher than last year) $ 16,288,185.85 Operating Costs($300,000 higher than previous year) $ 4,700,000.00 $ 11,588,185.85 0.4241 $ 4,914,549.62
10 Electricity Benefits (8% higher than last year) $ 17,591,240.72 Operating Costs($300,000 higher than previous year) $ 5,000,000.00 $ 12,591,240.72 0.3855 $ 4,853,923.30
11 Electricity Benefits (8% higher than last year) $ 18,998,539.98 Operating Costs($300,000 higher than previous year) $ 5,300,000.00 $ 13,698,539.98 0.3505 $ 4,801,338.26
12 Electricity Benefits (8% higher than last year) $ 20,518,423.17 Operating Costs($300,000 higher than previous year) $ 5,600,000.00 $ 14,918,423.17 0.3186 $ 4,753,009.62
13 Electricity Benefits (8% higher than last year) $ 22,159,897.03 Operating Costs($300,000 higher than previous year) $ 5,900,000.00 $ 16,259,897.03 0.2897 $ 4,710,492.17
14 Electricity Benefits (8% higher than last year) $ 23,932,688.79 Operating Costs($300,000 higher than previous year) $ 6,200,000.00 $ 17,732,688.79 0.2633 $ 4,669,016.96
15 Electricity Benefits (8% higher than last year) $ 25,847,303.89 Operating Costs($300,000 higher than previous year) $ 6,500,000.00 $ 19,347,303.89 0.2394 $ 4,631,744.55
16 Electricity Benefits (8% higher than last year) $ 27,915,088.20 Operating Costs($300,000 higher than previous year) $ 6,800,000.00 $ 21,115,088.20 0.2176 $ 4,594,643.19
17 Electricity Benefits (8% higher than last year) $ 30,148,295.26 Operating Costs($300,000 higher than previous year) $ 7,100,000.00 $ 23,048,295.26 0.1978 $ 4,558,952.80
18 Electricity Benefits (8% higher than last year) $ 32,560,158.88 Operating Costs($300,000 higher than previous year) $ 7,400,000.00 $ 25,160,158.88 0.1799 $ 4,526,312.58
19 Electricity Benefits (8% higher than last year) $ 35,164,971.59 Operating Costs($300,000 higher than previous year) $ 7,700,000.00 $ 27,464,971.59 0.1635 $ 4,490,522.86
20 Electricity Benefits (8% higher than last year) $ 37,978,169.32 Operating Costs($300,000 higher than previous year) $ 8,000,000.00 $ 29,978,169.32 0.1486 $ 4,454,755.96
Net Present Value $ (2,047,699.18)

Solar Collector Field:

Year Cash Flows Cash Inflows Cash Flows Cash Outflows Net Cash Flows P.V. @10% Amount
0 Electricity Benefits $ - Initial Cost $ 91,000,000.00 $ (91,000,000.00) 1 $ (91,000,000.00)
1 Electricity Benefits (8% higher than last year) $ 9,700,000.00 Operating Costs $ 3,000,000.00 $ 6,700,000.00 0.9091 $ 6,090,970.00
2 Electricity Benefits (8% higher than last year) $ 10,476,000.00 Operating Costs($350,000 higher than previous year) $ 3,350,000.00 $ 7,126,000.00 0.8264 $ 5,888,926.40
3 Electricity Benefits (8% higher than last year) $ 11,314,080.00 Operating Costs($350,000 higher than previous year) $ 3,700,000.00 $ 7,614,080.00 0.7513 $ 5,720,458.30
4 Electricity Benefits (8% higher than last year) $ 12,219,206.40 Operating Costs($350,000 higher than previous year) $ 4,050,000.00 $ 8,169,206.40 0.683 $ 5,579,567.97
5 Electricity Benefits (8% higher than last year) $ 13,196,742.91 Operating Costs($350,000 higher than previous year) $ 4,400,000.00 $ 8,796,742.91 0.6209 $ 5,461,897.67
6 Electricity Benefits (8% higher than last year) $ 14,252,482.34 Operating Costs($350,000 higher than previous year) $ 4,750,000.00 $ 9,502,482.34 0.5645 $ 5,364,151.28
7 Electricity Benefits (8% higher than last year) $ 15,392,680.93 Operating Costs($350,000 higher than previous year) $ 5,100,000.00 $ 10,292,680.93 0.5132 $ 5,282,203.85
8 Electricity Benefits (8% higher than last year) $ 16,624,095.41 Operating Costs($350,000 higher than previous year) $ 5,450,000.00 $ 11,174,095.41 0.4665 $ 5,212,715.51
9 Electricity Benefits (8% higher than last year) $ 17,954,023.04 Operating Costs($350,000 higher than previous year) $ 5,800,000.00 $ 12,154,023.04 0.4241 $ 5,154,521.17
10 Electricity Benefits (8% higher than last year) $ 19,390,344.88 Operating Costs($350,000 higher than previous year) $ 6,150,000.00 $ 13,240,344.88 0.3855 $ 5,104,152.95
11 Electricity Benefits (8% higher than last year) $ 20,941,572.47 Operating Costs($350,000 higher than previous year) $ 6,500,000.00 $ 14,441,572.47 0.3505 $ 5,061,771.15
12 Electricity Benefits (8% higher than last year) $ 22,616,898.27 Operating Costs($350,000 higher than previous year) $ 6,850,000.00 $ 15,766,898.27 0.3186 $ 5,023,333.79
13 Electricity Benefits (8% higher than last year) $ 24,426,250.13 Operating Costs($350,000 higher than previous year) $ 7,200,000.00 $ 17,226,250.13 0.2897 $ 4,990,444.66
14 Electricity Benefits (8% higher than last year) $ 26,380,350.14 Operating Costs($350,000 higher than previous year) $ 7,550,000.00 $ 18,830,350.14 0.2633 $ 4,958,031.19
15 Electricity Benefits (8% higher than last year) $ 28,490,778.16 Operating Costs($350,000 higher than previous year) $ 7,900,000.00 $ 20,590,778.16 0.2394 $ 4,929,432.29
16 Electricity Benefits (8% higher than last year) $ 30,770,040.41 Operating Costs($350,000 higher than previous year) $ 8,250,000.00 $ 22,520,040.41 0.2176 $ 4,900,360.79
17 Electricity Benefits (8% higher than last year) $ 33,231,643.64 Operating Costs($350,000 higher than previous year) $ 8,600,000.00 $ 24,631,643.64 0.1978 $ 4,872,139.11
18 Electricity Benefits (8% higher than last year) $ 35,890,175.13 Operating Costs($350,000 higher than previous year) $ 8,950,000.00 $ 26,940,175.13 0.1799 $ 4,846,537.51
19 Electricity Benefits (8% higher than last year) $ 38,761,389.14 Operating Costs($350,000 higher than previous year) $ 9,300,000.00 $ 29,461,389.14 0.1635 $ 4,816,937.12
20 Electricity Benefits (8% higher than last year) $ 41,862,300.27 Operating Costs($350,000 higher than previous year) $ 9,650,000.00 $ 32,212,300.27 0.1486 $ 4,786,747.82
Net Present Value $ 13,045,300.56

Net present value is the difference of Sum of Present values of cash inflows and Sum of Present values of cash outflows. If the value is positive then the project may be accepted. While evaluation of two or more alternatives takes place, then the proposal with the higher net present value may be selected since it results in a greater cash inflow over the duration of the project.

In the given scenario, Present values are calculated by calculating the present values of cash inflows in the form of revenues in the form of electricity and cash outflows such as installation cost and operating cost.

Installation Costs in case of Flat Solar Panels are $87 Million, Mechanized Solar Panels + $101 Million and Solar Collector Field + $91 Million.

Annual Operation and Maintenance costs for year 1, in case of Flat Solar Panels+ $2 Million, Mechanized Solar Panels + $2.3 Million and Solar Collector Field + $3 Million.

Increase Annual Operation and Maintenance costs year 2 onwardsin case ofFlat Solar Panels+ $250,000, Mechanized Solar Panels + $300,000 and Solar Collector Field + $350,000.

Annual Revenues in the form of Electricity in case of Flat Solar Panels + $6.9Million, Mechanized Solar Panels + $8.8 Million and Solar Collector Field + $9.7 Million

Annual Increase in Revenues is 8% in case of all alternatives and the Useful Life is 20 Years. Rate of Interest for calculation is considered as 10%

Present value factor is calculated as 1/1.10 ^ N where N is the year of operation.

Conclusion:

Hence the option to be selected is Flat Solar Panels since it results in higher overall cash flow for a period of 20 years.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
2. a) Consider a market where one firm (firm 1) currently produces, but a second firm (firm 2) is intending to enter and sell an identical product. The market has inverse demand given by p = 40 – Q, where Q is the total output sold in the market. Firm 1 has a marginal cost of 16 and firm 2 has a marginal cost of c < 16, with no fixed cost for either firm. Firm 2 has a choice of competing on price or quantity, with firms making their choices simultaneously (i.e. the market will be either a Bertrand or Cournot duopoly). If you were advising firm 2 on entering this market, how would you advise it to compete? To what extent would the size of firm 2’s cost advantage affect your advice?  b) Now assume that firm 2 is aware that other firms are considering entering the market, so the market may over time change from a duopoly to an oligopoly with more than two firms. This would not change the nature of competition (i.e. any additional firms would set price or quantity in line with the first…
1. Consider two firms (i=1,2) interacting in the market. Assume that firms compete in quantities and therefore they choose either to cooperate or not in each round. If a firm deviates it earns monopoly profit for a round and a punishment phase will follow from next round onwards (for ever) where both firms choose the Cournot quantity. Assume a discounting factor & and that firms meet in the market in every period. The demand facing the industry is p = 1 92. Let Q = q1 + 92 denote the aggregate industry output - 91 - level. Assume further that production is costless.
Q4 (30 points) Subsidy in Auctions Consider a sealed-bid second-price auction with two bidders. Valuation of bidder 1 is drawn from the uniform distribution on [0, 100], and valuation of bidder 2 is independently drawn from the uniform distribution on [0, 300].

Chapter 5 Solutions

Engineering Economic Analysis

Ch. 5 - Prob. 8PCh. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - Prob. 17PCh. 5 - Prob. 18PCh. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Prob. 29PCh. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Prob. 32PCh. 5 - Prob. 33PCh. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - Prob. 39PCh. 5 - Prob. 40PCh. 5 - Prob. 41PCh. 5 - Prob. 42PCh. 5 - Prob. 43PCh. 5 - Prob. 44PCh. 5 - Prob. 45PCh. 5 - Prob. 46PCh. 5 - Prob. 47PCh. 5 - Prob. 48PCh. 5 - Prob. 49PCh. 5 - Prob. 50PCh. 5 - Prob. 51PCh. 5 - Prob. 52PCh. 5 - Prob. 53PCh. 5 - Prob. 54PCh. 5 - Prob. 55PCh. 5 - Prob. 56PCh. 5 - Prob. 57PCh. 5 - Prob. 58PCh. 5 - Prob. 59PCh. 5 - Prob. 60PCh. 5 - Prob. 61PCh. 5 - Prob. 62PCh. 5 - Prob. 63PCh. 5 - Prob. 64PCh. 5 - Prob. 65PCh. 5 - Prob. 66PCh. 5 - Prob. 67PCh. 5 - Prob. 68PCh. 5 - Prob. 69PCh. 5 - Prob. 70PCh. 5 - Prob. 71PCh. 5 - Prob. 72PCh. 5 - Prob. 73PCh. 5 - Prob. 74PCh. 5 - Prob. 75PCh. 5 - Prob. 76PCh. 5 - Prob. 77PCh. 5 - Prob. 78PCh. 5 - Prob. 79PCh. 5 - Prob. 80PCh. 5 - Prob. 81PCh. 5 - Prob. 82PCh. 5 - Prob. 83PCh. 5 - Prob. 84PCh. 5 - Prob. 85PCh. 5 - Prob. 86PCh. 5 - Prob. 87PCh. 5 - Prob. 88PCh. 5 - Prob. 89PCh. 5 - Prob. 90PCh. 5 - Prob. 91PCh. 5 - Prob. 92PCh. 5 - Prob. 93PCh. 5 - Prob. 94PCh. 5 - Prob. 95PCh. 5 - Prob. 96PCh. 5 - Prob. 97PCh. 5 - Prob. 98PCh. 5 - Prob. 99PCh. 5 - Prob. 100PCh. 5 - Prob. 101P
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education