Diane is a financial analyst working for a large chain of discount retail stores. Her company is

looking at the possibility of replacing fluorescent lights with LED lights. The main advantage is

that LED lights are more efficient and less expensive. In addition they also last longer and have

to be replaced after 10 years, whereas fluorescent lights have to be replaced after 5 years. Of

course making the change will require large investments to purchase lights and hire labour to

replace them. Diane uses a 10 year horizon to analyse the proposal figuring that changes to

lighting technology will eventually make this investment obsolete.

Diane's friend David has analysed another energy saving investment opportunity replacing

fluorescent lights with solar lights. He also uses a 10 year horizon. Cash flow from the projects

are given below and the discount rate is 10% for both.

Year LED PROJECT SOLAR PROJECT

0 -4200000 -500000

1 700000 60000

2 700000 60000

3 700000 60000

4 700000 60000

5 1000000 60000

6 700000 60000

7 700000 60000

8 700000 60000

9 700000 60000

10 700000 60000

A) What is the NPV of each investment? Which investment if any should the company

undertake? 5 marks

B) David approaches Diane for a favour. David says that the solar lighting project is a pet

project of his boss and David really wants to get the project approved. He suggests Diane

that they roll their two projects into a single proposal. The cash flows for the combined

project would simply equal the sum of the two individual projects. Calculate the NPV of the

combined project? Is it worth investing? Do you recommend to go ahead with the combined

project? 10 marks

C) What is the ethical issue that Diane faces? Is any harm done if she does the favour for David

as he asks?

D) Also calculate the discounted payback period for the two individual projects. Compare and

contrast your answer with part A and comment if the two methods give you the same

decision or not.