As the owner-user of the 20,000 SF warehouse, you are considering whether to replace the existing lighting with energy efficient LED lighting. Current energy costs in this case are 11 per kWh (kilowatt-hour), and the existing lights use 10 kWh per square foot per year.

Replacement with LED lighting and intelligent lighting controls will reduce energy costs by 80%. Installation costs are $3.00/SF. Also, because LEDs last longer, they reduce annual maintenance costs by reducing the necessity to change light bulbs as often, saving an additional 10/SF per year.

3.1. If we capitalize the savings in energy and maintenance costs at an annual building cap rate of 9%, how much would the building increase in value, based on an income approach? (Income divided by cap rate, i.e. 0.09, equals value).

3.2 What is the net gain in building value after deducting the cost of the lighting upgrade?

3.4 How long is the payback period in months? (Cost of installation divided by operating cost savings per month).

3.5 Excluding installation costs, what are the total savings in operating costs over the next ten years?

3.6 What is the present value of the savings in operating costs over the next ten years, using a DCF model, if you apply an annual discount rate of 12%?

3.7 What is the IRR (internal rate of return) on the investment over a ten year period, assuming level electrical rates and an increase in residual value of $150,000 upon the sale of the asset at the end of Year Ten?