A remotely located air sampling station can be powered by solar cells or by runn

Question

A remotely located air sampling station can be powered by solar cells or by running an above ground electric line to the site and using conventional power. Solar cells will cost $16,600 to install and will have a useful life of 5 years with no salvage value. Annual costs for inspection, cleaning, etc., are expected to be $2400. A new power line will cost $31,000 to install, with power costs expected to be $1000 per year. Since the air sampling project will end in 5 years, the salvage value of the line is considered to be zero. At an interest rate of 10% per year:

a) Which alternative should be selected on the basis of an annual worth analysis.

b) What must be the first cost of the above ground line to make the two alternatives equally attractive economically?

Explanation / Answer

(a)

SOLAR CELL

Equivalent annual worth ($) = 16,600 x A/P (10%, 5 years) + 2400

= 16,600 x 0.26 + 2400

= 6,716

POWER LINE

Equivalent annual worth ($) = 31,000 x A/P (10%, 5 years) + 1000

= 31,000 x 0.26 + 1000

= 9,060

Since the solar cell has a lower equivalent annual cost than power line, the solar cell should be selected.

(b) Let the first cost of ground line be Z.

Then,

6,716 = Z x A/P (10%, 5 years) + 1000

Z x 0.26 = 5,716

Z = 5,716 / 0.26 = 21,984

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