Suppose that university regulations are proposed requiring all new dorm faciliti

Question

Suppose that university regulations are proposed requiring all new dorm facilities utilize solar energy for water heating. A new dorm facility is being built and two hybrid water heating systems that utilize solar to supplement natural gas heating. Option 1 is based on double glazed flat plate collectors and Option 2 uses evacuated tubular collectors. Both options have a useful life of 20 years. Pertinent data is listed in the table below. Assuming an interest rate of 10%, which option is preferred?

Option 1

Option 2

Capital Cost:

$3,200,000

$2,700,000

Annual Maintenance Cost:

$50,000

$80,000

Anticipated Fuel Savings:

$600,000

$560,000

Option 1

Option 2

Capital Cost:

$3,200,000

$2,700,000

Annual Maintenance Cost:

$50,000

$80,000

Anticipated Fuel Savings:

$600,000

$560,000

Explanation / Answer

Option 1:

Annual net benefit = Fuel savings - Maintenance cost = $(600,000 - 50,000) = $550,000

NPV ($) = - 3,200,000 + 550,000 x PVIFA(10%, 20) = - 3,200,000 + 550,000 x 8.5136 = - 3,200,000 + 4,682,480

= 1,482,480

Option 2:

Annual net benefit = $(560,000 - 80,000) = $480,000

NPV ($) = - 2,700,000 + 480,000 x PVIFA(10%, 20) = - 2,700,000 + 480,000 x 8.5136 = - 2,700,000 + 4,086,528

= 1,386,528

Since Option 1 has higher positive NPV, option 1 should be chosen.

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