Chapter 21 Computer Case

Lila Lovetree was examining the latest electric bill for her store, All Organics. Even though it was November, the bill was still $1,200.00, as the weather was still very warm. Lila wants to examine installing some energy efficiency equipment to reduce the environmental impact of her store, but needs to make sure any endeavors are cost justified. Her neighbor, Vinnie Vegan, told her that the Cost 1 class at USFSP could assist her by preparing such a cost analysis.

Lila could invest up to $60,000 in such equipment without depleting all the companys cash reserves. Her current bills average $1,000 per month, and are expected to increase 10% per year. Lilas other utilities (water etc.) cost $500 per month and are also expected to increase 5% per year.

All Organics currently has no debt. She has met with several vendors and is considering the following alternatives:

1. Solar panels Cost $50,000. Lila estimates that her electric bill will decrease 50% per year. The solar panels would not affect usage of other utilities. The contractor estimates that solar panels would have a 10 year economic life and salvage equal to 10% of the original cost.
2. Energy efficient HVAC Cost $30,000. More efficient heating and cooling equipment would decrease the electric bill 40% per year, but would not affect any other utilities. The equipment would last approximately 10 years with no anticipated salvage.
3. Reconfigure plumbing system Cost $20,000. Lila has noticed that her store has water leaks due to the age of the plumbing system. The contractor has estimated that her other utilities cost will decrease 50% if the system is reconfigured. The new plumbing system would last 8 years with no salvage.
4. Change the temperature of the store Lila currently keeps the store at 75 degrees in summer and winter. But raising the temperature one degree in summer and decreasing such in winter will save $100 per month in electric costs, with no capital investment.

All Organics profits are $100,000 per year, pretax. Lilas needed rate of return on investments is 8%. Organics uses straight line depreciation. Lila is interested adopting sustainable business practices and feels that these will add to the appeal of her store. All computations should be done PRETAX.

Hello what would be the payback period and AAROR and for 2-4? I'm stuck on those values