Payback Period and IRR of a Cost Reduction Proposal-Differential Analysis

A light-emitting diode (LED) is a semiconductor diode that emits narrow-spectrum light. Although relatively expensive when compared to incandescent bulbs, they use significantly less energy and last six to ten times longer, with a slow decline in performance rather than an abrupt failure.

Metropolitan City currently has 40,000 incandescent bulbs in traffic lights at approximately 6,000 intersections. It is estimated that replacing all the incandescent bulbs with LEDs will cost $17.7 million. However, the investment is also estimated to save the city $4.42 million per year in energy costs.

a. Determine the payback period of converting Metropolitan City traffic lights to LEDs.

Round answer to one decimal place.

____years

b. If the average life of an incandescent streetlight is one year and the average life of an LED streetlight is seven years, should the city finance the investment in LEDs at an interest rate of 5% per year? Justify your answer.

1. Compute the internal rate of return on the project. Round to the nearest whole percent.

______%