You are thinking about installing solar panels in your house. You currently pay $500 of electricity every year, and with solar panels your electricity consumption will be only $100.
The solar panels will last for 5 years and they will cost you $1500, paid now (at year 0).
a) On any given year from year 1 until year 5, how much money are you saving with the panels? (Don't think about the installation costs just yet)
b) Considering a discount rate of 5%, what is the Net Present Value (NPV)of this investment? The NPV is the sum of all discounted flows from year 0 until year 5. Should you install solar panels?
c) Now consider a discount rate of 15%. What is the new Net Present Value of this investment? Should you install solar panels under this new scenario?