Example 1

Problem:
a. A project will cost $15,000 and save $8089/yr. The investor’s discount rate is 10%. The equipment life is 10 years. Is this an attractive investment?
b. The investor will borrow $15,000 at a 7% interest rate for 10 years. What will the monthly loan payment be? What will the monthly net cash flow be?

Answer:
a. Since IRR>discount rate and NPV>0, this is an attractive investment.
b. Monthly loan payment =174. Monthly net cash flow=$499.

Example 2

Problem:
A hotel owner is planning to retrofit existing T12 fluorescent lights with energy efficient T8 lighting. The project requires an investment of $6,960. Annual electrical savings are expected to be $2,097. The economic life of the new fixtures is assumed to be 10 years. If the investor’s required rate of return (discount rate) is 10%, is this project an attractive investment?

Answer:
NPV= $6,263. IRR= 28%. Since NPV > 0 and IRR > discount rate, this is an economically attractive option.

Example 3

Problem:
A building owner is considering replacing his existing boiler with a high efficiency unit. The new equipment will cost $48,000 but save $12,800 per year in natural gas. The boiler is expected to last 20 years. The owner wants a 15% return on the project. He can finance the project for 6.75% if he takes a 5 year loan term.
What is the IRR of the project before financing? What will his monthly net cash flow be during the term of the loan and after the loan is paid off.

Answer:
IRR=26.5%. During the term of the loan monthly cash flow will be a positive= $122. After the loan is paid off savings will accrue at the rate of $1,067/month.

Example 4

Problem:
An investor is constructing a new building. Options for the 1950sf of windows are being considered. Standard double pane windows cost $16/sf. High performance, low emissivity windows cost $21/sf. The high performance windows will result in the building using less energy. The annual savings is $1014. The investor’s time value of money is 8%. Either type of window is expected to last 20 years. What is the annual return on upgrading to high performance windows?

Answer:
The incremental cost of the upgrade is $5/sf*1950sf= $9750. This is used as the project cost. IRR= 8.48 %.