Calculate the payback period for the solar panels

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Question - Sonoma is considering investing in a solar paneling roof for one of its large distribution facilities. The investment will cost $9,000,000. It is expected to last 6 years and has no salvage value. The company expects the yearly utility savings to increase over time as follows:

Year 1 $1,000,000

Year 2 $1,500,000

Year 3 $2,000,000

Year 4 $2,500,000

Year 5 $3,500,000

Year 6 $4,500,000

In screening their projects, the company uses the payback period and the Accounting Rate of Return equal to at least 10%. Any potential investments that DO NOT hit BOTH criteria are immediately rejected.

Required -

a) Calculate the payback period for the solar panels.

b) Calculate the ARR for the solar panel project.

c) Discuss whether the company should consider the project or reject the project.

Reference no: EM132756346

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