An engineering design firm is considering the use of solar power for its stand-alone
office. Two options are being considered: (1) continue to use electric power from the
grid; and (2) remain connected to the grid but use solar with net metering to feed back
into the grid when excess power is generated, resulting in a credit for future use. Energy
rates anticipated for the upcoming year, per kilowatt-hour (kwh), are approximately
$0.13 for off-peak pricing and $0.16 for on-peak pricing. These prices are expected to
increase annually at a rate of 8.0% and 6.6%, respectively. Annual demand is estimated
to be 7,190kwh during hours considered to be "on-peak" with all being during daylight
hours when solar panels are effective. "Off-peak" annual demand is 7,835 kwh when the
sun is available, and 8,920kwh when there is lack of sun. For Option 1, costs include
the energy charges for kwh used during on-and off-peak times, plus a monthly "service
charge" of $70 simply for having access, regardless of kwh used. For Option 2, in
addition to the monthly "service charge," a 5 kw solar capacity with inverter, charge
controller, current limiter, and interfacing will be used with no storage capacity at a cost
of $27,000; part of the demand will be provided by the solar array, and the rest
(particularly at night and when there is lack of sun) will be provided by the utility
company (the grid). Excess energy from the solar array will be fed back into the grid and
credited back to the engineering design firm. Annual maintenance and testing will cost
$150 the first year, increasing by $110 each year thereafter. The salvage value after 12
years will be $3,500. Following are the annual kwh figures for each option:
Option 1:kwh
from grid
On Peak w/sun 5620
On Peak w/o
1570
sun
On Peak w/sun 7835
On Peak w/o
8920
sun
Part (a)
Option 2:kwh
from solar
5620
Option 2:kwh
from grid
Option 2:kwh
returned to grid
1570
1570
7835
0
8920
5230
0
Company management wants to decide between the two alternatives. The planning
horizon is 12 years and annual interest is 7%. Determine the PW of each alternative
using present worth analysis. In calculating present worth, let costs be positive-valued
and salvage value be negative-valued. Use the monthly service charge to calculate the
amount paid annually.
Option 1 = $------------?
Option 2= $-------------?
Which option should be selected:
(Option 1 or 2)--------Should be chosen as it has the (Lower or greater)---------PW of
cost.
Pick one of which is in the parenthesis.