A university spent $1.3 million to install solar panels atop a parking garage. T

Question

A university spent $1.3 million to install solar panels atop a parking garage. These panels will have a capacity of 300 kilowatts (kW) and have a life expectancy of 20 years. Suppose that the discount rate is 10%, that electricity can be purchased at $0.20 per kilowatt-hour (kWh), and that the marginal cost of electricity production using the solar panels is zero.

Hint: It may be easier to think of the present value of operating the solar panels for 1 hour per year first.

Approximately how many hours per year will the solar panels need to operate to enable this project to break even?

1,272.49

2,544.98

3,308.47

2,799.48

If the solar panels can operate only for 2,290 hours a year at maximum, the project (would/would not) break even.

Continue to assume that the solar panels can operate only for 2,290 hours a year at maximum.

In order for the project to be worthwhile (i.e., at least break even), the university would need a grant of at least

a. $130,245.10

b. 65,122.55

c. 156,294.12

d. 182, 343.14

Explanation / Answer

(1) Option (2)

If minimum number of hours per year be H, then

$1,300,000 = (300 x H x $0.2) x P/A(10%, 20)

$1,300,000 = 60H x 8.5136**

H = $1,300,000 / ($60 x 8.5136) = 2,544.98

(2) The project would not break-even.

Since actual number of hours < break-even number of hours, project will not break even.

(3) Option (a)

Required grant ($) = First cost - Present worth of revenues

= 1,300,000 - [2,290 x 300 x 0.2 x P/A(10%, 20)]

= 1,300,000 - (137,400 x 8.5136**)

= 1,300,000 - 1,169,768.64

= 130,231.36

NOTE: The slight difference is due to rounding-off.

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