March 19: Selecting a Brand of Solar Panels Suppose there are two competing bran
ID: 2548782 • Letter: M
Question
March 19: Selecting a Brand of Solar Panels Suppose there are two competing brands of solar panels that can be selected for community solar projects. The total cost and annual benefits of the proposed installations vary by the location of the project. Brand Annual Benefit Total Cost San Leandro, CASunTech $36,000,000530,000,000 San Leandro, CA REC 64,250,0001,055,000,000 Miami, FL Miami, FL REC 79,500,000|$-1,206,000,000 West Lafayette, IN SunTech 22,425,000$272,500,000 West Lafayette, IN REC23,250,000296,000,000 .Assume a useful lifetime of 25 operating years, a discount rate of 4.00%, that all costs are borne up front, and that operation begins one year after the initial costs are paid. Which brand should be selected at each location? Show your work. What is the minimum discount rate which would cause all three locations to prefer SunTech? Explain why a larger discount rate makes SunTech relatively more favorable.Explanation / Answer
1.
In San Leandro, CA, Suntech and West Lafayette, IN, SunTech will be selected as it has higher NPV (shown in last column in bold).
In Miami, FL, REC will be selected as it has higher NPV (Shown in last column in bold)
PV of annuity = PV(4%,25) = 15.62208
2. Using discount rate of 4.18%, we get
PV (4.18%,25) = 15.32906
NPV is shown below:
Using discount rate of 4.17%, we get
PV (4.17%,25) = 15.34512
NPV is shown below:
So, at 4.17%, REC will be chose but at 4.18%, SunTech will be chose for all locations. So, minimum discount rate is 4.18%.
A larger discount rate will have no impact on Total cost but there will be a huge impact on the present value of Annual benefits. An increase in discount rate will reduce the present value. Now, for REC Annual benefit value in absolute terms is very high and will reduce rapidly with the increasing discount rate in comparison with SunTech. So, with lower initial cost and annual benefit in absolute terms, larger discount rate will make SunTech more favourable.
Location Brand Total Cost Annual Benefit PV of annuity PV of Benefit Net Present Value CA SunTech 530,000,000 36,000,000 15.62208 562,394,878 32,394,878 CA REC 1,055,000,000 64,250,000 15.62208 1,003,718,636 -51,281,364 FL SunTech 600,000,000 40,000,000 15.62208 624,883,198 24,883,198 FL REC 1,206,000,000 79,500,000 15.62208 1,241,955,356 35,955,356 IN SunTech 272,500,000 22,425,000 15.62208 350,325,143 77,825,143 IN REC 296,000,000 23,250,000 15.62208 363,213,359 67,213,359