Introduction

Vanke (SEHK:2202) is one of the largest owners and managers of Class A office spaces in

the growing innovation hubs of Shenzhen.1 Project manager Natalie Yang is in the midst of

overseeing renovations of Vankes Horizontal Skyscraper. Among the long lists of upgrades

Natalie has specified, modern recessed lighting throughout the property is sure to be a huge

hit. All the fixtures have already been installed. Natalie just has to decide between halogen

or LED bulbs. Natalie estimates that installing halogen bulbs would cost roughly $5 per bulb

while LED bulbs would be substantially more costly at roughly $30 per bulb. The Horizontal

Skyscraper is 128,000 square meters and has 1 recessed light for every 16 square meter, so the

total increase in cost from using LEDs is $200,000, a large amount given this is just for light

bulbs. However, Natalie thinks the extra costs might just be worth it because LED bulbs last

nearly 16 times as long as halogens. Your task is to help Natalie use the concept of Net Present

Value to decide which type of bulb to use. Use the following assumptions:

Halogen bulb expected lamp life: 3000 hours

LED bulb expected lamp life: 48,000 hours

Lights operate: 12 hours a day 250 Days a year

Halogen bulb price stays constant for foreseeable future

After 16 years, the light fixtures will be replaced, i.e., no need to include in your calcula-

tions anything that happens after year 16

Interest Rate: 5%

Questions

1. What type of light bulb should Natalie Choose?

2. What are the cost savings (in present value terms) of your recommendations relative to

the alternative?

3. What type of light bulb should Natalie choose if the interest rate is 15%?