Discount Solar Panel
Economics Help?
A large factory is contemplating the purchase of a Solar Panel Heating system The system will cost $500,000 now. However, after a careful evaluation of the savings that will be generated by the system, management determined that the net present value of the investment is positive. If the firm expects the system to save $50,000 per year (end-of-year values) for each of the next 20 years, what discount rate are they using? (Answer to 4 decimal places)
OK, so im thinking about formulas to use, and im guessing i just have to solve for ” i ” in the formula im given? Where ” i ” is the interest rate or whatever it may be in this case….just not sure how to do it
This is a poorly worded question because there are an infinite number of answers- specifically, all real numbers on the interval (0,IRR).
Your intuition is right you need to solve for i such that the PV of the annuity = $500k. Said another way, you need the discount rate so that the NPV=0- this is the definition of the IRR.
If you are using a financial calculator:
PMT=50k, PV=-500k, pmts=20 and solve for i.
You can do this just as easily in Excel with the finanial functions or creating the TVM equations.
Any discount rate between (0, 0.0775) yields a positive NPV