An electrical energy audit indicates that lighting consumes 12.5 10 6 kWh per ye
ID: 2382732 • Letter: A
Question
An electrical energy audit indicates that lighting consumes 12.5 106 kWh per year. By using more efficient lighting fixtures, electrical energy savings of 8% can be achieved. The additional cost for these energy efficient lighting fixtures is about $90,000 (due mostly to the need for new ballasts). Assuming that the average energy charge is $ 0.06 per kWh, is the expenditure justified based on a minimum rate of return (i.e., a discount rate) of 7.0 %. Assume a 10-year life cycle and use the present worth, annual cost, and rate of return methods.
Explanation / Answer
Current annual cost = 12.5*10^6*0.06=$750000
Saving = 8%*$750000
= $60,000
Net present worth
$90,000
1
-$90,000
1
$60,000
0.925926
$55,556
2
$60,000
0.857339
$51,440
3
$60,000
0.793832
$47,630
4
$60,000
0.73503
$44,102
5
$60,000
0.680583
$40,835
6
$60,000
0.63017
$37,810
7
$60,000
0.58349
$35,009
8
$60,000
0.540269
$32,416
9
$60,000
0.500249
$30,015
10
$60,000
0.463193
$27,792
$3,12,605
Net present worth is positive and hence, expenditure is justified , 90,000 additional cost is justified as there is positive NPV it should be accepted.
$90,000
1
-$90,000
1
$60,000
0.925926
$55,556
2
$60,000
0.857339
$51,440
3
$60,000
0.793832
$47,630
4
$60,000
0.73503
$44,102
5
$60,000
0.680583
$40,835
6
$60,000
0.63017
$37,810
7
$60,000
0.58349
$35,009
8
$60,000
0.540269
$32,416
9
$60,000
0.500249
$30,015
10
$60,000
0.463193
$27,792
$3,12,605
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