Quizzol

QUESTION:

Industries is evaluating whether to invest in solar panels to provide some of the electrical needs of its main office building in

Boulder,

Colorado.

The solar panel project would cost

$ 500 comma 000

and would provide cost savings in its utility bills of

$ 65 comma 000

per year. It is anticipated that the solar panels would have a life of

years and would have no residual value.

Requirements

1. Calculate the payback period in years of the solar panel project

If the company uses a discount rate of

10%,

what is the net present value of this project?

If the company has a rule that no projects will be undertaken that have a payback period of more than five years, would this investment be accepted? If not, what arguments could the energy manager make to try to obtain approval for the solar panel project?

What would you do if you were in charge of approving capital investment proposals?

ANSWER:

Requirement 1. Calculate the payback period in years of the solar panel project.

Determine the formula, then calculate the payback period. (Round your answer to two decimal places.)

	Initial investment	÷	Expected annual net cash inflow	=	Payback period
	$500,000	÷	$65,000	=	7.69	years

Requirement 2. If the company uses a discount rate of

10%,

what is the net present value of this project? (Round your answer to the nearest whole dollar. Use parentheses or a minus sign for a negative net present value.)

The net present value of the project is	$(5,610)	.

Requirement 3. If the company has a rule that no projects will be undertaken that have a payback period of more than five years, would this investment be accepted? If not, what arguments could the energy manager make to try to obtain approval for the solar panel project?

because the payback period is

than five years.

Select arguments the energy manager could make.

The payback period is not considering the cash inflows that occur after that period.
The payback method is only focusing on time, not on profitability.

Requirement 4. What would you do if you were in charge of approving capital investment proposals? (If an input field is not used in the table, leave the input field empty; do not select a label.)


Determine if the capital investment creates a positive net present value.
Ensure the funds are available for the purchase of the capital investment.

Posted by Cleveland on September 5, 2024

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