Question

an electrical energy audit indicates electrical motor consumption is 4 x 106 kwh per year. by upgrading the motor spares with high efficiency motors a 10% savings can be realized. the additional cost for these motors is estimated at $80,000. assuming an 8 cents per kwh energy charge and 20-year life, is the expenditure justified based on a minimum rate of return of 20% before taxes?

Answer 1

The switch to high efficiency motors, with an initial cost of $80,000, is justified as it leads to a total savings of $640,000 over a 20-year period, clearly surpassing the minimum required rate of return of 20% before taxes.

Step-by-step explanation:

An electrical energy audit indicates that the electrical motor consumption is 4 x 106 kWh per year. By upgrading to high efficiency motors, a 10% savings in energy consumption can be achieved. With an electrical rate of 8 cents per kWh, the annual savings would be $32,000 (10% of 4 x 106 kWh times $0.08 per kWh).

Over a 20-year period, these savings amount to $640,000 ($32,000 per year times 20 years), which significantly exceeds the additional cost of $80,000 for the new motors. To determine if the expenditure is justified based on a minimum rate of return (MRR) of 20% before taxes, we can use the Net Present Value (NPV) calculation or simply compare the overall savings to the MRR. However, even without exact NPV calculations, it is evident that the return on investment (ROI) is above 20% as the total savings is 8 times the initial investment over the motor's lifespan, making the expenditure justified.