Question

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Analyze a CSR Capital Investment Proposal for Den-Tex Company Den-Tex Company is evaluating a proposal to replace its HID (high intensity discharge) lighting with LED (light emitting diode) lighting throughout its warehouse. LED lighting consumes less power and lasts longer than HID lighting for similar performance. The following information was developed: 500 watts per hr. 300 watts per hr. 700 HID watt hour consumption per fixture LED watt hour consumption per fixture Number of fixtures Lifetime investment cost (in present value terms) to replace each HID fixture with LED Operating hours per day Operating days per year $500 10 300 Metered utility rate per kilowatt-hour (kWh)* $0.11 *Note: A kilowatt-hour is equal to 1,000 watts per hour. a. Determine the investment cost for replacing the 700 fixtures. $ b. Determine the annual utility cost savings from employing the new energy solution. $ c. Should the proposal be accepted? Yes Evaluate the proposal using net present value, assuming a 15-year life and 8% minimum rate of return. (Click here to view Present Value of Ordinary Annuity.)

Answer 1

a.	Investment cost=Life time investment cost*Number of fixtures=500*700=$ 350000
b.	Annual utility cost savings:
	Kilowatt-hour saved per fixture per day:
								Kilowatt
	HID Kilowatt hour consumption per fixture					(500/1000)		0.5
	Less: LED Kilowatt hour consumption per fixture					(300/1000)		0.3
	Kilowatt-hour saved per fixture per day:							0.2
	Kilowatt-hour saved per year=Kilowatt-hour saved per fixture per day*Operating hours per day*Operating days per year*Number of fixtures=0.2*10*300*700=420000 Kilowatt-hours
	Annual utility cost savings=Kilowatt-hours saved per year*Metered utility rate per kilowatt-hour=420000*0.11=$ 46200
c.	Net present value=Present value of annual utility cost savings-Investment cost
	Present value of annual utility cost savings=Annual utility cost savings*Discount factor at 8% for 15 years=46200*8.55948=$ 395448
	Net present value=395448-350000=$ 45448
	The proposal should be accepted since the net present value is positive
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