The XX Company is considering a process upgrade that is intended to save energy and boost production.  Production currently runs at 10,000 production units per year.  With the proposed alternative, production would increase to 15,000 units per year

The XX Company is considering a process upgrade that is intended to save energy and boost production.  Production currently runs at 10,000 production units per year.  With the proposed alternative, production would increase to 15,000 units per year.  The profit margin (excluding energy costs) is $150 per unit in both the present and alternative case.

Current system: 1,000 kW load; 24 hours x 5 days x 52 weeks per year; demand is zero over weekends.

Proposed upgraded system alternative: Initial cost including installation is $2 million.

The proposed system will produce the following load profile, 5 days per week, 52 weeks per year:  Over a 24 hour day, 1,200 kW for 4 hours, 700 kW for 8 hours, and 800 kW for 12 hours; demand is zero over weekends.

The utility costs are summarized below for the next three years:

Now        Year 1        Year 2

kWh cost         $0.04        $0.05          $0.06

kW cost           $6.00        $7.00          $8.00

off-peak

kW cost           $12.00     $14.00         $16.00

on-peak

Peak is from June 1 to August 30 each year (assume 4 weeks per month).  On and off-peak rates are 24 hours per day.

We are using a 3-year time horizon and a standard end-of-year convention for all cash flows that occur during a year.

1. Calculate a payback period for the proposed alternative. Given that the XX Company uses a 2-year payback criterion for project selection, interpret your results. (5 pts) SEE BELOW.
2. Develop a net present worth for each alternative; assume a hurdle rate of 10% annual. Interpret your result – should we invest in the alternative? (10 pts)
3. Calculate an energy intensity metric for each alternative. Interpret your result – would the alternative result in an energy savings? Explain.  (10 pts)