Sonoma is considering investing in solar paneling for the roof of its large distribution facility.

The investment will cost $9 million and have a six-year useful life and no residual value.

Because of rising utility costs, the company expects the yearly utility savings to increase over time as follows:

The company uses the payback period and ARR to screen potential investments.
Company policy requires a payback period of less than five years and an ARR of at least 10%. Any potential investments that do not meet these criteria will be removed from further consideration.
1. Calculate the payback period of the solar panels.
2. Calculate the ARR of the solar panels.
3. Should Sonoma turn down the solar panel investment or consider it further?

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Year 1 $1,000,000 Year 2 $1,500,000 Year 3 $2,000,000 Year 4 $2,500,000 Year 5 $3,500,000 Year 6 $4,500,000