A steel company wishes to replace the lighting in its warehouse with an energy efficient LED system.Installing the new lighting system will cost $1.5 million,but is expected to generate a cost savings of $140,000 per year for the next 25 years,when the new lights will need to be replaced.If the steel company has a cost of capital of 6%,what is the NPV of this investment?
A)$289,670
B)$2 million
C)-$1.5 million
D)$140,000
E)$1,789,670

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) is calculated by discounting the future cash flows (savings in this case) back to their present value and then subtracting the initial investment. Using the formula for NPV and a discount rate of 6%, the correct NPV for this investment is $289,670. This takes into account the $140,000 annual savings over 25 years, discounted back at the 6% rate, minus the initial $1.5 million investment.

A Steel Company Wishes to Replace the Lighting in Its