Herschel Industries is evaluating whether to invest in solar panels to provide some of the electrical needs of its main building in Innsbrook, Virginia. The solar panel project would cost $550,000 and would provide cost savings in its utility bills of $80,000 per year. It is anticipated that the solar panels would have a life of 15 years and would have no residual value.
Requirements
1. Calculate the payback period in years of the solar panel project.
2. If the company uses a discount rate of 10%, what is the net present value of this project?
3. If the company has a rule that no projects will be undertaken that would 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?
4. What would you do if you were in charge of approving capital investment proposals?