Question

15. The cost to install numerous smart grid applications in Fresno is $40,000,000 in year 0. Engineers expect that the benefits for installing the applications will be $2,000,000 annually for the next 15 years. If the standard rate of return is 8%, should the utility company implement the smart grid applications? Support your response with calculations a) b) How much annual savings (nearest million would be required to make the project break even if the duration was 10 years?

smart grid, power system

please don't answer if you not sure

Answer 1

(15) (a) Initial Cost = $ 40000000 in Year 0, Annual Benefits = $ 2000000, Tenure = 15 years and Standard Rate of Return = 8 % ( Discount Rate)

Project NPV = Total PV of Annual Benefits - Initial Cost = 2000000 x (1/0.08) x [1-{1/(1.08)^(15)}] - 40000000 = - $ 22881042.62

As the project NPV is negative, the utility company should not implement the smart grid.

(b) Tenure = 10 years, Let the required annual benefits be $ P

If the project just breaks-even, then Sum of PV of Annual Benefits = Initial Cost

40000000 = P x (1/0.08) x [1-{1/(1.08)^(10)}]

40000000 = P x 6.710081399

P = 40000000 / 6.710081399 = $ 5961179.548 ~ $ 5961180 or $ 5.96 million