Net Book Value Formula
Posted in Entertainment on 06/19/2011 10:48 pm by admin
Cost of installing solar panels?
Your folks are thinking about installing solar panels on their roof. They know a distributor so they can get a good deal on the panels. The cash flow looks something like this:
- Pay $11,000 right now for the panels
- Save $3,000 per year for each of the next six years
- Recover $9,000 when they sell their house at the end of year six.
What is the total net present value of the project? Assume an annual interest rate of 7.2%.
Note:
- If the project ends up costing you money, report a net present value less than zero.
- Provide a numeric answer without the $ sign.
- You can work the NPV equation manually, in Excel, or use the (P/A) formula from the book.
These numbers don’t look realistic, but this is an accounting problem, no a real-life one.
NPV of the $11k paid = $11k (cash)
It would be more realistic to assume that the person would pay their electric bill every month, and save 1/12 of that $3000 each time. It would also be more realistic to assume that the saved dollars would grow with inflation. However, the problem seems to be set up for fixed annual savings of $3000. So the NPV of $3k, saved after 1 year, is 3000/(1+0.072) = 2798.51 . The NPV of the second $3k is 3000/(1.072)^2 = 2610.55 . And so on, for 6 years, just add up each year’s contribution.
The NPV of the $9k recovered when the house is sold, presumably because a buyer would pay more for a house with panels and lower energy costs, is 9000/(1.072)^6 = , etc.
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