Question 1 ABC Company would like to invest in a new electrical switching system if the payback period is less than 5 years. Two types of electrical switching System X and Y are being evaluated. The initial investment cost and maintenance cost for System X are $2,500,000 and $250,000 respectively while the initial investment cost and maintenance cost for System Y are $1,700,000 and $200,000 respectively. The estimated energy cost savings for System X and System Y are 550,000 kWh per year and 450,000 kWh per year respectively.

a) Assuming the electric tariff is $1.25 per kWh. What are the payback periods of System X and System Y? (Hint: Yearly cost saving = energy cost saving maintenance cost).

b) Which system would you suggest ABC Company to adopt?

c) If the cost of capital is 14% and assuming the system life is 5 years, would you suggest ABC Company to adopt the system in (b)?

Question 2 Wangs Company considers purchasing an electric car, EV-1, for business use. The initial cost of EV-1 is $625,000. It can be used for 4 years, and that it will be sold for $20,000 at the end of year 4. It is estimated that the future cash inflows generated by the EV-1 will be $170,000 each year for the next four years.

(i) Assuming that the cost of capital is 6%, should the company purchase the EV-1?

(ii) Suppose the price of EV-1 has been reduced to $580,000. Should the company purchase it at this reduced price?

(iii) Suppose a new electric car, EV-2 which costs $720,000, will be soon available in market. EV-2 can be used for five years and will generate cash inflows of $170,000 per year for five years. It is estimated that EV-2 can be sold for $8,000 at the end of year 5. Calculate the NPV of purchasing EV-2.

(iv) Refer to (ii) and (iii). Which one of the two electric cars should the company purchase? Explain