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EPM In-Class Activity 1

1. The document provides details on calculating the capital cost, simple payback period, and net present value (NPV) of installing solar panels versus purchasing electricity from a utility over 15 years. 2. The capital cost of installing solar panels on a 500m2 area is $40,000. The simple payback period is 8 years. 3. The NPV of installing solar panels is $46,820.53, while the NPV of purchasing electricity from the utility is $55,591.93. Since the utility NPV is higher, the solar panel project is not financially viable.

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Gokul Krish
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19 views

EPM In-Class Activity 1

1. The document provides details on calculating the capital cost, simple payback period, and net present value (NPV) of installing solar panels versus purchasing electricity from a utility over 15 years. 2. The capital cost of installing solar panels on a 500m2 area is $40,000. The simple payback period is 8 years. 3. The NPV of installing solar panels is $46,820.53, while the NPV of purchasing electricity from the utility is $55,591.93. Since the utility NPV is higher, the solar panel project is not financially viable.

Uploaded by

Gokul Krish
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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In-class Activity #1

Student Details:

1. Gokulakrishanan Sridharan (110092082)


2. Palaniappan Muthaiah (110094023)

To solve the problem, we'll need to calculate the capital cost, simple payback, and net present value
(NPV) for installing the solar panels and compare it to the cost of purchasing electricity from the utility.

Given Data:

1. Number of years = 15
2. Purchase cost of electricity from the utility per year = $5000
3. Maintenance cost of solar panels per year = $3000
4. Maintenance Years = 3, 7, 12
5. Interest rate = 4%
6. Area available for solar panels = 500m2
7. Cost per square meter = $80/m2

Solution:

A. Capital Cost of Installing Solar Panels:

The area available for solar panels is 500 m², and the cost per square meter of panels is $80. Therefore,
the capital cost can be calculated as follows:

Capital Cost = Area * Cost per square meter

Capital Cost = 500 m² * $80/m²

Capital Cost = $40,000

B. Simple Payback:

The simple payback period is the time it takes for the initial investment to be recovered through energy
savings. In this case, the simple payback can be calculated as follows:

Simple Payback = Capital Cost / Annual Savings

Annual Savings = Cost of purchasing electricity from the utility = $5000/year

Simple Payback = $40,000 / $5,000 per year


Simple Payback = 8 years

C. Net Present Value:

To calculate the net present value (NPV), we need to consider the cash flows for installing the solar
panels and the maintenance costs over the next 15 years and compare them to the cost of purchasing
electricity from the utility.

1. Installing Solar Panels and Maintenance Costs:

The annual maintenance cost is $3,000 in years 3, 7, and 12. We can calculate the NPV using the formula:

NPV = ∑ [Cash Flow / (1 + Interest Rate) ^Year]

NPV = -Capital Cost + ∑ [(Annual Savings - Maintenance Cost) / (1 + Interest Rate) ^Year]

Expense Revenu NPV NPV NPV


Year s e Expenses Revenue Total

$40,000.0 $40,000.0
0 $40,000 $0 0 $0.00 0

3 $3,000 $0 $2,666.99 $0.00 $2,666.99

7 $3,000 $0 $2,279.75 $0.00 $2,279.75

12 $3,000 $0 $1,873.79 $0.00 $1,873.79

15 $0 $0 $0.00 $0.00 $0.00

SUM OF
PROJEC $46,820.5
T NPV = 3

Project NPV for installing solar panels and maintenance costs = $46,820.53

2. Purchasing Electricity from the Utility:

NPV = - ∑ [Cost of purchasing electricity from the utility / (1 + Interest Rate) ^Year]
Purchasing electricity for the next 15 years

Yea NPV NPV


r Expenses Revenue Expenses Revenue NPV Total

1 0 5000 0 4807.692308 4807.69231

2 0 5000 0 4622.781065 4622.78107

3 0 5000 0 4444.981793 4444.98179

4 0 5000 0 4274.020955 4274.02096

5 0 5000 0 4109.635534 4109.63553

6 0 5000 0 3951.572629 3951.57263

7 0 5000 0 3799.589066 3799.58907

8 0 5000 0 3653.451025 3653.45103

9 0 5000 0 3512.933678 3512.93368

10 0 5000 0 3377.820844 3377.82084

11 0 5000 0 3247.904658 3247.90466

12 0 5000 0 3122.985248 3122.98525

13 0 5000 0 3002.870431 3002.87043

14 0 5000 0 2887.375414 2887.37541

15 0 5000 0 2776.322514 2776.32251

SUM OF
PROJECT
NPV = 55591.9372

Project NPV for purchasing electricity from the utility = $55591.93

D. Project Assessment:

Since the NPV for installing solar panels and maintenance costs are greater than the NPV for purchasing
electricity from the utility, the project should not be pursued because it’s not financially viable.

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