# equivalent annual worth

A rural utility company provides standby power to pumping stations using diesel-powered generators. An alternative has arisen whereby the utility could use a combination of wind and solar power to run its generators, but it will be a few years before the alternative energy systems are available. The utility estimates that the new systems will result in savings of $15,000 per year for 3 years, starting 2 years from now, and $25,000 per years for 4 more years after that. At an interest rate of 8% per year, what is the equivalent annual worth (years 1-8) of the projected savings?

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A rural utility company provides standby power to pumping stations using diesel-powered generators. An alternative has arisen whereby the utility could use a combination of wind and solar power to run its generators, but it will be a few years before the alternative energy systems are available. The utility estimates that the new systems will result in savings of $15,000 per year for 3 years, starting 2 years from now, and $25,000 per years for 4 more years after that. At an interest rate of 8% per year, what is the equivalent annual worth (years 1-8) of the projected savings.

Year Cash Flow Discounting Factor at 8% Discounted value

1 $- 0.926 $-

2 $15,000.00 0.857 $12,860.08

3 $15,000.00 0.794 $11,907.48

4 $15,000.00 0.735 $11,025.45

5 $25,000.00 0.681 $17,014.58

6 $25,000.00 0.630 $15,754.24

7 $25,000.00 0.583 $14,587.26

8 $25,000.00 0.540 $13,506.72

PV $96,655.82

PVIFA(8%,8) 5.747 (You can see these values from PVIFA tables at the end of standard text books)

Equivalent Annual Cost $16,819.54.

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