Question

please complete the 4 requirements for E12-23

Wouw A Calculate the payback and NPV for a sustainable energy project E12-23A Calci Grant Industries is electrical needs of (Learning Objectives 1 & 3) ant Industries is evaluating whether to invest in solar panels to provide some of the SUSTAINABILITY ctrical needs of its main office building in Buffalo, New York. The solar panel project ould cost $600,000 and would provide cost savings in its utility bills of $50,000 per year. It is anticipated that the solar panels would have a life of 20 years and would have no re- sidual value. Requirements 1. Calculate the payback period in years of the solar panel project. 2. If the company uses a discount rate of 12%, what is the net present value of this project? 3. If the company has a rule that no projects will be undertaken that have a payback period of more than five years, would this investment be accepted? If not, what arguments could the energy manager make to try to obtain approval for the solar panel project? 4. What would you do if you were in charge of approving capital investment proposals?

Answer 1

Solution:

Payback Period It's the length of time required for an investment to recover its initial cost. The payback period is calculated in times. It's the simplest method to calculate the investment proposal. The Formula to Calculate the Payback Period is shown below. Payback period = Initial investment Annual Cash flow

Net present value: Net present value is also known as NPV is a technique of capital budgeting to evaluate the viability of a projected project or investment. NPV is calculated as the difference between the present value (PV) of total cash inflow and present value (PV) of total cash outflows. NPV = PV of cash inflows - PV of cash outflows If NPV is positive it means the investment decision is financially viable. If NPV is negative it means the investment decision is not financially viable and if NPV is zero it means there will be no financial benefit or loss.

Sustainability: It means the ability of a system as well as the economic system, in such a way that it is able to continue its work for an indefinite period. It can also be explained as a development that meets the requirement of the present generation without conceding the needs of future generations. In this evolving era business organizations have realized that sustainability is a more integral and strategic part of a company. They are realizing that profitability and sustainability often go hand in hand not in odds.

GT is evaluating the decision of investing in solar panels, the cost of the project is $600,000, cost savings in utility bills is $50,000 per year. It is expected to have a life of 20 years with no residual value. Calculate the payback period of solar panels using the equation as shown below: Initial investment Payback period = Annual Cash flow $600,000 $50,000 = 12 years Hence, the payback period of solar panels is 12 years

The present value of an annuity of 12% for 20 years is 7.469. Calculate the NPV of the project with a discount rate of 12% using the equation as follows: NPV = PV of cash inflows - PV of cash outflows = ($50,000x7.469) - $600,000 = $373,450 - $600,000 =($226,550) Hence, NPV of the solar panel project with a discount rate of 12% is 50)

This investment in the solar panel would not be accepted because payback period of solar panel project is 12 years as there is a rule in a company to reject the proposals having a payback period of more than 5 years. The argument that could be made by managers to obtain approval is that the payback method is only focusing on time factor but not on profitability. Also, cash inflows after the payback period are not considered which is also an important factor.

In this evolving era business organizations have realized that sustainability is a more integral and strategic part of a company. They are realizing that profitability and sustainability often go hand in hand not in odds. Installing a solar panel will make company self-sufficient for the electricity generation. But NPV of the solar panel project is negative. Which means it is not profitable financially to invest in solar panels. But there are also various factors that need to be considered.

Hence, one is in charge of approving capital investment proposals, he or she would approve the investment in solar panel project.