Steve is considering installing a solar hot water system (SHH2OS) in his business to transfer some of his power consumption off the grid. Steve knows that the up-front costs of the SHH2OS including materials and labor are $11,600. Future operating and maintenance costs are negli- gible. Obviously, SHH2OSs work best and are most efficient when it is sunny outside. However, it is not always sunny outside where Steve’s business currently resides. Therefore, Steve knows the SHH2OS will save him at most 80% but at least 50%, with a most likely number around 70% of the electricity he normally would use for hot water heating each month. From past records, Steve has estimated that the business’s electricity bills run about $450 a month. However, some months they could be as high as $575 or as low as $290. Steve also estimated that hot water heating in general makes up anywhere from 30% to 50% of the electric- ity bill with a most likely number of 40%. Solar Incentives Currently, there are no discounts for installing an SHH2OS. However, Steve is expecting new legislation to be passed on the federal and state levels that will allow some discounts on the cost of a system. The federal legislation would allow for a 35% discount off the total price on the SHH2OS. The state legislation would allow for a flat $1400 discount on any SHH2OS originally priced above $5000.
Payback Period Calculations and Concerns
Steve would like to know his expected payback period from the installation of the SHH2OS with and without the discounts. The payback period for an investment or project is the number of periods it takes before the investment’s or project’s initial investment is paid back.
Simulation Modeling and Discussion Questions
Using Excel, create a simulation model to help Steve. Given the following assumptions, run the simulation model for 100,000 trials and interpret the results. Help Steve understand: 1. What his expected monthly and annual saving could be with the new unit with and with- out the discounts. 2. The payback period for the SHH2OS with and without the discounts. Distribution Assumptions
Variable Distribution
Monthly electricity saving from the SHH2OS Triangular: 50% as the low, 70% as the most likely, and 80% as the high
Monthly electricity bills Triangular: $290 as the low, $450 as the most likely, and $575 as the high
Percent of electricity from hot water heating Triangular: 30% as the low, 40% as the most likely, and 50% as the high