Question

An energy manager is considering three energy saving projects A, B and C that will last up to 5 years. These projects have an initial cost of $2000, $2800 and $3200, respectively. The MARR is 10%. The budget limit on the initial investment is $4800. (i) What type of economic analysis does the energy manager need to perform to make a decision? (ii) List the steps involved in this economic analysis.

student numbers : 283

Answer 1

Answer :

1) We need to calculate present worth of each project and will choose project which have Highest present worth.

2)

Present worth = sum of present worth annual return - initial investment

Since Sum of present worth of annual return =annual return *(1-(1+r)^-n) /r

3)

Annual returns for

A=283+80=$363

B=283+280=$563

C=283+250=$533

Initial investment for

A=$2000

B=$2800

C=$3200

r=10%

n=5 years

Present worth of A=363*(1-(1+10%)^-5)/10% - 2000=-$624.23

Present worth of B=563*(1-(1+10%)^-5)/10% -2800=-$666.23

Present worth of C=533*(1-(1+10%)^-5)/10%-3200=-$1179.93

From above calculation it is clear that project A has highest present worth compare to project B and C.

So Project A will be chosen.since we have budget of $4800 for initial investment and project A has only $2000 as initial investment So we will also choose project B because it's present worth is also greater than Project C and initial investment for project B is only $2800.