ENGINEERING ECONOMIC ENHANCED EBOOK
14th Edition
ISBN: 9780190931940
Author: NEWNAN
Publisher: OXF
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Question
Chapter 5, Problem 100P
To determine
Which of the alternatives is preferable.
Expert Solution & Answer
Answer to Problem 100P
The option to be selected is Solar Collector Field, since it results in a higher overall
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
Flat Solar Panels:
| Year | Cash Flows | Cash Inflows | Cash Flows | 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.
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Chapter 5 Solutions
ENGINEERING ECONOMIC ENHANCED EBOOK
Ch. 5 - Prob. 1QTCCh. 5 - Prob. 2QTCCh. 5 - Prob. 3QTCCh. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6PCh. 5 - Prob. 7P
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