Question

Two methods can be used to produce solar panels for electric power generation. Method I will have an initial cost of $740.000, an AOC of $150,000 per year, and $160,000 salvage value after its 3-year life. Method 2 will cost $890.000 with an AOC of $160,000 and a $140.000 salvage value after its 5-year life. Assume your boss asked you to determine which method is better, but she wants the analysis done over a three-year planning period, You estimate the salvage value of Method 2 will be 37% higher after three years than it is after five years. If the MARR is 13% per year, which method should the company select? The company should select (Click to select)

Answer 1

Given Method 1 Initial cost AOC Salvage Value Life 740000 150000 160000 Method 2 Initial cost AOC Salvage Value at end of 5 year Life Salvage Value at end of 3 year Life 890000 160000 140000 37% more than at end of 5 years w MARR 13% Solution Step 1: Calculate salvage Value at end of 3 year for method 2 Salvage Value = Salvage Value = Salvage Value = Salvage value at end of year 3 + 37% X Salvage value at end of year 3 140000 + 37% X 140000 191800 $ Step 2: Calculate Present Value for both the Methods PV Method PV Method 2 Cashflow Cashflow Year PVE Method 1 Method 2 0 -740000 -890000 1 1 - 1500001 - 160000 0.885 -1500001 - 160000 0 .783 3 10000 3 1800 0.693 NPV where, PVF (Present Value Factor) = where r is MARR and n is Number of year PV (Present Value) = Cashflow Year 3 = -740000.00 -890000.00 1-132743.36 -141592.92 -117472.00 -125303.47 6930.5022039.00 -983284.86 -1134857.39 NPV (1/(1+r))" Cashflow X PVF AOC + Salvage Value The company should select Method 1, as NPV is less negative for method 1 as compared to method 2