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  3. a small firm spends $6,500 annually on electricity

A small firm spends $6,500 annually on electricity. Johnson Controls offers to install a new...

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Accounting

A small firm spends $6,500 annually on electricity. Johnson Controls offers to install a new computer-controlled lighting system that will reduce electric bills by $1,250 in each of the next 8 years. The system costs $6,000 to install. At the end of four years, another investment of $1,750 will be required to keep the system working at optimal level. It is assumed that any firm buying the machine now will make the investment after four years to keep the machine working at optimal level. The system will not have any value at the end of its life. Assume the cost savings are known with certainty and the interest rate is 10%.

  1. Calcualte the NPV of installing the new lighting system. Use the timeline method for this. (10)
  2. Should the firm install the new lighting system? Why or why not? (4)
  3. If the annual savings is instead $1,350, what is the NPV of installing the new lighting system? Use the timeline method to find the answer. (10)
  4. Calculate the IRR (or IRRs) of the project when annual savings is $1,350. (3)
  5. Describe how one can check if there are multiple IRRs for a project. (3)

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