Babson Energy Savers (BES), located in Massachusetts, is a successful ESCO. Its business is energy saving remodeling projects, such as heating and air conditioning systems, low voltage versus high voltage power conversions, and automatic switching controls. A small part of their current business involves energy saving through conversion to fluorescent fixtures. In general, conventional fluorescent fixtures were not very popular in the ESCO market. Only about 6 million fluorescent bulbs a year were being sold to ESCOS at about $ 4 each. The ESCOs marked up the bulbs about $ 1 to customers, for a gross margin on bulbs of 20%. CFL bulbs could create a new business opportunity for firms such as BES. The small size and simple ballasting for Dulux allow a much wider range of fixture design options than with fluorescent, as well as the huge energy savings and long life advantages. Once the idea was explained to them, the BES engineers shared GLU management's enthusiasm for the Dulux lamp. BES felt that with proper pricing, the cost savings would be very attractive for many of their customers. In order to test the new product in this segment, Boehmer convinced BES to propose using Dulux lighting as part of an overall energy savings project for one of Boston's old classic hotels, the Copley Grand. GLU would provide financing to the hotel for the cost of retrofitting existing fixtures (12% annual rate and payments over 15 years) through GL's captive finance subsidiary. The hotel would expense the entire loan payment each year as rent expense for the fixtures. GLU would guarantee the hotel annual savings in power cost at least double the annual payment on the retrofitting loan.

The hotel lighting configuration is as follows:

Rooms: 10 floors with 25 rooms per floor. Each room averages 200 occupied days per years. There are 9 lights in each room (4 table or vanity, 3 overhead, and 2 wall) at 100 watts each (bulb cost = $ 1,20 each). Average usage per room rental is a total of 7 hours.

Halls: 10 floors with 24 overhead lights per floor (one 50 watt bulb each). Average usage of 24 hours per day. Bulb life for the hotel, using incandescent bulbs, was 800 hours for room lamps and 1.400 hours for hall lamps. Turning incandescent bulbs on an off substantially shortens the useful life.

The cost of electricity in Boston is high, averaging $ 0,14 per kilowatt-hour (kWh). In other parts of North America, power costs can be half that rate.

The hotel was currently buying about 1.900 bulbs/year: o 200 nights per year x 7 aggregate lighting hours = 1.400 room lighting hours per year / 9 bulbs per room = 155 hours per room bulb per year. With a bulb life of about 800 hours, this is about a 5-year life per bulb. This is about 450 new bulbs per year (2.250 / 5). o 240 hall bulbs at 6 changes per year (8760 hrs. 1.400 hrs. per bulb) = 1.440 bulbs/year o 450+1.440 = approx. 1.900 bulbs per year.

Bulbs are changed by the hotel maintenance staff as they burn out.

BES cost to retrofit the hotel light fixtures is as follows: o To retrofit a typical incandescent overhead fixture for CFL lamps costs $ 7 for material (reflector, ballast, igniter and housing modifications) and one half hour of electrical technician labor at $ 18 per hour. To retrofit a table or vanity fixture costs $ 2,50 for material and one quarter hour of labor. Wall fixtures cost $ 3 for material and 40 minutes to retrofit. o BES electrical technicians would do the conversion job. Lighting fixtures typically have a life of 15 years. BES normally earns 40% gross margin on conversion projects.

The question: What is the present value of CFL bulbs to the hotel over the 15 years life of the fixtures?