At your parents home, a light bulb has gone out, and one of your parents asked you to figure out which bulb to buy as a replacement. There are three basic kinds of lightbulbs:

- Incandescent bulbs: These are the kind invented about a hundred years ago by Thomas Edison. These are the least expensive, but they use a lot of power and don’t last very long.
- Compact Fluorescents: These have the little spirals inside. They last a lot longer, but also cost significantly more than the incandescents.
- Light Emitting Diodes (LED) bulbs: These are the newest, most expensive, and longest lasting.

The website bulbs.com sells many different kinds of light bulbs. Here are some of each kind.

Here are three comparable bulbs in the 60 watt (or equivalent) class:

Here are three comparable bulbs in the 100 watt (or equivalent) class:

Electricity is sold on a per kilowatt hour (“kwh”) basis, and the cost varies considerably by geography. For comparison, I pay about 28 cents per kwh for electricity, at the margin. So, ask your parents how much they pay per kwh of electricity. If they don’t know or if you don’t want to ask, just use 25 cents per kwh.

Based on your research, assess the extra spending on LED or CF lightbulbs, relative to purchasing incandescents. Describe this investment in terms of NPV, IRR, and Payback Period. Make a clear, well written recommendation.

Print out the analysis and turn it in at the next class session.

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From a student:

For the light bulb problem I have calculated all the expenses for the light bulbs and the energy costs associated with the different bulb types, but I don’t understand how we can calculate an IRR or payback period, because one cannot receive money from using a light bulb. I may just be misinterpreting the question.

Response:

Just like the receipt of cashflows over time has a NPV, so too does the payment of cashflows over time. Same concept. While you can’t receive money from a light bulb, you can certainly save money on an electric bill… and that’s real cash.

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