You own a 2000 square foot home and your usual power costs (payable to CPS Energy)...

 

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You own a 2000 square foot home and your usual power costs (payable to CPS Energy) are $150 per month. Of these total power costs, 50% of the billing costs are due to lighting with incandescent bulbs and the rest of the costs are attributable to air-conditioning, appliance use and so on. You need to replace all the 50 light bulbs at your home right away. The choice is to either buy and continue using incandescent light bulbs (each costs $1) or buy the newer energy efficient bulbs that cost $10 each. The newer energy efficient bulbs will reduce the CPS power bill costs for the lighting component by 40%. These new bulbs have a life of 10 years. On the other hand, incandescent bulbs last 5 years and will need to be replaced again after 5 years. a. What is the NPV and IRR of the light bulb replacement project if your required return on your investment is 8% a year (opportunity cost if you had placed this money in a balanced mutual fund)? b. Draw an NPV profile that illustrates the NPV and IRR of the project. c. How will the NPV change if your estimated savings on the lighting part of the power are 20% instead of 40% for the lighting component? You own a 2000 square foot home and your usual power costs (payable to CPS Energy) are $150 per month. Of these total power costs, 50% of the billing costs are due to lighting with incandescent bulbs and the rest of the costs are attributable to air-conditioning, appliance use and so on. You need to replace all the 50 light bulbs at your home right away. The choice is to either buy and continue using incandescent light bulbs (each costs $1) or buy the newer energy efficient bulbs that cost $10 each. The newer energy efficient bulbs will reduce the CPS power bill costs for the lighting component by 40%. These new bulbs have a life of 10 years. On the other hand, incandescent bulbs last 5 years and will need to be replaced again after 5 years. a. What is the NPV and IRR of the light bulb replacement project if your required return on your investment is 8% a year (opportunity cost if you had placed this money in a balanced mutual fund)? b. Draw an NPV profile that illustrates the NPV and IRR of the project. c. How will the NPV change if your estimated savings on the lighting part of the power are 20% instead of 40% for the lighting component?

Answer rating: 100% (QA)

To calculate the NPV and IRR of the light bulb replacement project we need to consider the cash flows associated with both options incandescent bulbs ... View the full answer