A landlord considers installing photovoltaic equipment on his roof. Photovoltaic equipment generates solar power. It enables the direct transfer of sunlight into electric power. The roof accepts an equipment of 2 kilowatt with maximum sunlight. In Germany, on average 850 kilowatt hours of power can be generated per kilowatt in use annually. The original cost of the 2-kilowatt-equipment is € 11,200. The annual operating cost is € 100. The period of use is assumed to be 10 years.

According to the federal law of renewable energy (Erneuerbare-Energie-Gesetz, EEG) the generated energy can be sold to the local utility for a guaranteed price fixed by the government.

Thus, the household acts as a power generator subsidised by the government. The guaranteed price is 50 cents per kilowatt hour on average.

For your calculations consider that all payments occur at the end of each period. Only the initial outlay is due at the beginning of the economic life. Assume that the whole amount of power produced is sold to the local utility. The landlord calculates with an interest rate of 8 %.

a) Calculate the net present value of the investment.

b) The federal government is subsidising environmental protection energies. The landlord has the opportunity to take out a loan for the initial outlay without paying interest from a publicly owned bank (Kreditanstalt für Wiederaufbau). After two years without repayment he must repay the loan over the next eight years at constant rates. What is the net present value under these conditions?

c) Due to a change in the law, the guaranteed price is set back to 35 cents per kilowatt hour from the fifth year of use on. How does this affect the investment’s net present value? Assume the same conditions as in subtask b except for the lower guaranteed price.

d) The landlord makes a last consideration: He assumes an economic life of 20 years, but no lowering of the guaranteed price. Instead he plans assuming a guaranteed price of 50 cents per kilowatt hour over the entire economic life. Recalculate the net present value. Again, except for the changed economic life, assume the same conditions as in subtask b.

e) Justify your results: Under which assumptions would you advise the landlord to accept the investment of solar generated power?