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# Tutorial on Capital Costs: Light Bulbs

 Posts: 4,509 Add as FriendChallenge to a DebateSend a Message 9/21/2011 11:08:22 PMPosted: 6 years agoDebates on the costs of alternative energy recently have shown that many people are perplexed by the calculations, particular of capital costs. I've tried here to provide a relatively simple example. It gets complicated enough.The idea is to compare the costs of three light bulbs including the purchase price, capital costs, and electricity. Here are three products I found on amazon.com. Each claims to produce 400 lumens, like a 60 watt incandescent bulb:cost power life (hrs)LED \$15.00 7 25000CFL \$1.00 14 10000Incandescent \$0.46 60 1000So the LED unit costs \$15, draws seven watts, and is claimed to last 25,000 hrs.To start with, assume the national average price for a kilowatt hour of electricity and the utility bond interest rate. These are:Cost / kwh \$0.11Interest Rate4.00%Okay. Which is cheapest if the light is to be on about 3 hours per day -- 1000 hrs per year. The LED will cost \$1.98 to run. It uses 77 cents worth of electricity. 1/25 of the bulbs 25,000 hour life is consumed, 60 cents. To those costs, the cost of having money tied up in a light bulb rather than invested must be added. The bond interest rate of 4% is one investment possibility, and a year of that at \$15 costs 60 cents.However, if the person has credit card debt costing 16%, then paying off that debt would yield a saving of \$2.40. The cost of capital depends on what alternatives are available. With the higher cost of capital, the LED unit would cost \$3.77 for the year, rather than \$1.98.Using 4% interest rate, the CFL comes in at \$1.68 and old fashioned incandescent at \$7.70.Now suppose the bulb is on 24/7 for the year. The LED wins at \$12.80, with the CFL at \$14.41, and the incandescent at \$61.86. Low power consumption beats the higher capital cost of the LED.Finally, suppose the bulb is in the closet with the Christmas ornaments, and is used only 2 hours a year. Now the incandescent wins \$0.033, to \$0.043 (CFL) and \$0.60 (LED). Actually, would anyone figure on keeping a light bulb for 5000 years -- the life of the CFL in the application? It would be more reasonable to assume that after 50 years you'll give up on it. The CFL and LED are then more expensive relative to the incandescent, the LED 22 times as much.I live in California where electric rates quickly soar to 42 cents, a punishment for sin. Then the costs for 1000 hr/year usage favor LED lamps, even at \$15 apiece.It's also worth thinking about maintenance costs. A company must pay someone to change the bulb, which might cost \$15 or most in labor. That's effectively added to the bulb cost.I haven't figured other attributes into the calculation. A \$1 CFL has in my experience an annoying flicker. LEDs are usually more beautiful. We just did cost here.If anyone would like to play with the spreadsheet for this problem, it's here:factspluslogic.com/LightingCosts.xls
 Posts: 18,337 Add as FriendChallenge to a DebateSend a Message 9/22/2011 2:31:08 AMPosted: 6 years agoMostly, it makes sense, but you are assuming a guaranteed rate of return on your investment which you then add to the cost of the light bulb. In reality, you never know how much you are going to get from an investment. Adding it to the price will obviously inflate the cost. A better alternative would be to include the time value of money for long-term calculations.
 Posts: 4,509 Add as FriendChallenge to a DebateSend a Message 9/22/2011 1:32:21 PMPosted: 6 years agoAt 9/22/2011 2:31:08 AM, F-16_Fighting_Falcon wrote:Mostly, it makes sense, but you are assuming a guaranteed rate of return on your investment which you then add to the cost of the light bulb. In reality, you never know how much you are going to get from an investment. Adding it to the price will obviously inflate the cost. A better alternative would be to include the time value of money for long-term calculations.The 4% interest rate is for a long term bond, so the rate is locked in for 20 or 30 years. Interest rates are near a historical low, so locking up money in a long term fixed asset is actually less attractive than supposed. Historical stock market returns are around 9%, which is probably a better number.There is nothing to "time value of money" other than expected rates of return. For cost estimates on Government contracts, the Government provides a table of expected inflation rates to use in estimating the contract. Point is that something has to be projected, and there is no certainty.
 Posts: 11,204 Add as FriendChallenge to a DebateSend a Message 9/22/2011 2:21:20 PMPosted: 6 years agoWell If your going to consider the capital cost of the light bulb, how much it costs compared to the alternative of investing, why not consider fuel as a capital cost as well?Open borders debate: http://www.debate.org...
 Posts: 4,509 Add as FriendChallenge to a DebateSend a Message 9/22/2011 2:39:30 PMPosted: 6 years agoAt 9/22/2011 2:21:20 PM, darkkermit wrote:Well If your going to consider the capital cost of the light bulb, how much it costs compared to the alternative of investing, why not consider fuel as a capital cost as well?I don't understand. Fuel is bought and consumed. The cost of electricity is in the cost equation, and it's true that the future cost is uncertain. Electricity, corrected for inflation, was stable for several decades until about the past decade, when government started insisting on using uneconomical green energy. An equation for future electricity costs could be used instead of the fixed cost, but that's not a capital cost.