# Problem 1. Case REI’s Solar Energy Program 1.1. The analytical approach taken by

Problem 1. Case REI’s Solar Energy Program 1.1. The analytical approach taken by REI in evaluating Phase 2 solar installations is presented in Exhibit 5 and in the spreadsheet shown in Exhibit 6. There are, however, several areas that are questionable: the tax treatment of avoided costs; the use of a blended federal/tax rate; and the application of a blended tax rate to the federal accelerated depreciation, rather than considering both state and federal depreciation schedules. Construct a modified model for the analysis of a store in California. Use marginal tax rates of 35% for federal, and 8.8 % for state. For depreciation in California, use a 200 percent declining balance method over 12 years (with straight line for the last 6 years). What are the impacts on the NPV and IRR of the project after accounting for these changes? 1.2. Which economic assumptions are the most crucial in REI’s financial assessment of potential new solar installations? Show that changes in these assumptions have a significant impact in the estimated values of the IRR (use the data table tool in excel). Problem 2. Green Lodging, Inc. Green Lodging is considering replacing bulbs with the purpose of reducing the operating expenses and enhancing the environmental performance of the company. Green Lodging has a total of 150 classic rooms and 40 suites. The average occupancy during a year is about 80%. Each classic room has a total of three bulbs and each suite has five bulbs. Data collected from the utility bill indicated that bulbs in the rooms and suites would likely be turned on about three hours per day. The company is considering replacing all the bulbs in the classic rooms and suites by Compact Fluorescent Bulbs (CFLs). The bulbs currently in use are 45-watt incandescent and can be acquired at a cost of $0.50. It is estimated that these bulbs can last up to 1,000 hours. The CFLs have a maximum wattage of 14 watts, cost $1.50 per unit, and can last up to 10,000 hours. It is estimated that replacing each bulb will require maintenance work at a cost of $2 per bulb. The cost of electricity is about $0.17/kWh. Assume that the prices of electricity will increase at 2.5% every year. Given the uncertainty about future utility prices, it is estimated that the appropriate discount rate for the cash flows of the upgrade projects is 9.5%. 2 2.1. Estimate the Net Present Value and Internal Rate of Return of replacing the current bulbs with CFLs. 2.2. How does the Net Present Value of the upgrade projects change for different values of the occupancy rate? Use the tool “Data Table” in excel. 2.3. Estimate the carbon footprint reduction for the company. Use the updated emissions factors provided by the EPA. Problem 3. Acid Rain: The Southern Company (A) The case introduces a framework for the analysis that supports managerial decisions on how to comply with emissions reductions regulation, in this case the 1990 Clean Air Act amendments. 3.1.The company has several options available for complying with the new law. The cost of these options is derived either from investments required to reduce emissions internally in the company, or from purchasing allowances. Two options were studied in class. Estimate the cost of pursuing the following additional options: A. The company installs scrubbers in 2000. B. The company switches to low-sulfur coal in 1996. C. The company switches to low-sulfur coal in 2000 (Phase II). D. The company switches to low-sulfur coal in 1996, and installs scrubbers in 2000. E. The company switches to low-sulfur coal in 2000, and installs scrubbers in 2000. 3.2. Based on the cost of implementing each option, what should the company do?