Exercise 3-11 Non-discounting and discounting methods ofinvestment appraisal To generate warm water, a landlord checks if sun collectors on the roof are a worthwhile investment. The initial outlay would be € 4,000. The economic life is estimated to be 20 years. Experience shows that the installation of sun collectors on equivalent buildings with the orientation of the collectors in the same direction yield savings in energy of 180 kilowatt hours (kWh) per month. For one kilowatt hour €0.15 must be paid to the local utility. Annual maintenance costs for the sun collectors are € 149.63 €. Alternatively money could be left on deposit at 6 %.

a) How much is the accounting rate of return of the investment? Compute the payback period in addition to that. Measure the length of time in which the initial outlay is recouped.

b) What should the investment advice be with regard to your calculations in question a?

c) Rework problem a on the assumption that a government grant of € 2,000 is awarded, assuming that the savings in electricity remain the same.

d) State whether the investment is worthwhile using both the internal rate of return and the net present value (otherwise identical assumptions as in part c). Assume that the initial outlay has to be paid at the beginning of the first year of use. All other payments occur at the end of the year.

e) Comment critically on the difference between the results from the accounting rate of return method and the internal rate of return method.