The owner of an office building wants to know if it is less costly - in terms of both up-front costs and in paying the electric bills - for a new energy efficient fluorescent lighting system, compared to the present lighting system. The time period that the owner wants to consider is 7 years, since the new lighting system could be installed using an equipment lease. The interest rate that the owner will pay on the lease is 10%, so this is the minimum attractive rate of return on this investment. The annual costs that can be compared by economic analysis methods are:

• Capital cost of lighting systems: Zero for the existing lighting system compared to $20,000 for the new.
• Energy costs for lighting systems: $16,000 per year for the existing lighting, $10,400 per year for the new lighting. Cost for operations and maintenance: $500 per year for the existing lighting, zero for the new lighting.
• Cost of equipment repair: $2000 per year for the existing lighting, zero for the new lighting.
• Cost for equipment replacement: $300 per year for the existing lighting, zero for the new lighting.

What is the difference in the NPV after 7 years when comparing the new lighting system to the old?

Is the investment worth making?

What is the NPV when a discount rate equal to the IRR is used for n = 7 years?

What is the IRR after 7 years?