03 · Test

Cape Manufacturing solar investment case — Test your model under various assumptions

Case study · Cape Manufacturing · Operations challenges the assumption

Your Year-1 comparison favours A for the fastest payback. The next question is long-term value: the supplied 20-year model puts C ahead under the base assumptions, but that result depends on how much solar output the factory can use.

Monday 13:15 · Thandi Jacobs · Production Manager

Will we really use 78% of System C’s output?

Production varies during the week. If we cannot use as much solar power at the time it is generated as Supplier C assumes, does C still offer the highest net present value (NPV)?

Stage outcome and evidence

Outcome for this stage: Evaluate the sensitivity of an investment decision to a material operational assumption and interpret the implications for management.

Evidence: completed Test Assumptions!A7:E14, crossover interpretation and an evidence requirement concerning the factory load profile.

Course guidance · compare payback and NPV

“Will we really use 78% of System C’s output?”

Simple payback favours System A at about 2.92 years. A 20-year discounted cash-flow view tells a different story: under the base assumptions, System C has the highest NPV at about R2.871 million.

Why? Payback focuses on recovery speed. NPV considers the value today of future net savings over the full analysis period.

Hold the assumptions for A and B fixed while varying C’s self-consumption. This isolates the effect of the operational uncertainty.

Decision question

Does System C still create the most long-term value if Cape Manufacturing cannot use as much of its solar output as the supplier expects?

Excel instruction · sensitivity table

Work on the Test Assumptions sheet

The scenario rates are already entered in A8:A14: 78%, 75%, 72%, 70%, 68%, 65%, 60%.

The NPV engine and highest-NPV formula are already supplied in B8:E8 of the student workbook. You do not need to transcribe them.

Select D8 and inspect the Formula Bar. Find $A8: this links C’s self-consumption to the scenario in column A. Dollar signs keep the column fixed when the formula is copied.
Select B8:E8 and drag the fill handle down through row 14. Inspect D9: the scenario reference should now be $A9, while the Case Data references remain fixed.
Format B8:D14 as rand currency with no decimals. A and B should remain unchanged; only C’s self-consumption varies.
Identify the two scenario rates between which B overtakes C. Refine the estimate by temporarily entering 74%, then 73.9%, in A14. Watch D14 and E14 recalculate; then restore A14 to 60%.

Google Sheets compatibility: select B8:E14 and use Fill down if dragging is difficult; use Format → Number → Currency for the results.

Advanced: How the NPV engine works

For each of 20 years, the supplied formula calculates generation after degradation, multiplies it by self-consumption and the escalating tariff, then subtracts escalating maintenance. It discounts each year-end net saving to today and subtracts the initial installed cost at time zero. The workbook expands these annual terms explicitly, so each term can be inspected in the Formula Bar.

A and B use fixed base-case self-consumption. C uses $A8, which becomes $A9 when filled down. All other case inputs are anchored. The 20-year horizon is fixed for this activity.

The supplied =CHOOSE(MATCH(MAX(B8:D8),B8:D8,0),"A","B","C") identifies the highest NPV. In an exact tie it returns the first matching proposal; inspect the values when interpreting the crossover.

Check your answer · sensitivity results

C self-consumption	Expected NPV C	Highest NPV
78%	≈ R2.871m	System C
75%	≈ R2.716m	System C
72%	≈ R2.561m	System B
70%	≈ R2.458m	System B
68%	≈ R2.355m	System B
65%	≈ R2.199m	System B
60%	≈ R1.941m	System B

Formative checkpoint · find the crossover

Compare columns C and D in rows 8:14. Find the interval where the ranking changes.

Check your answer

System B overtakes System C at approximately 74% self-consumption. The modelled crossover is about 73.96%.

Interrogate the assumption, not just the number

Which would be more useful for validating self-consumption: annual electricity consumption, or half-hourly load data aligned with expected solar production?

Why half-hourly data?

Self-consumption depends on when electricity is used relative to solar generation. Annual totals can conceal a mismatch between midday PV production and the factory’s load profile.

Completed: completed sensitivity table Test Assumptions!A7:E14 and a reasoned view on the operational data management still needs.

Next: turn conflicting evidence and uncertainty into an executive recommendation.

Sensitivity crossover chart for Proposal C self-consumption

What should management do with the crossover result?

Reject Proposal C immediately. Accept the supplier's 78% assumption. Obtain better evidence about the factory load profile. Choose Proposal A because it has the shortest payback.

Glossary & further reading · optional

Discounted cash flow and present value: Discounted cash flow converts future net cash flows into equivalent values today using a discount rate. Each converted amount is its present value; here the cash flows are net electricity savings.
Net present value (NPV): NPV adds the present values of future net cash flows and subtracts the initial investment. A positive NPV indicates modelled value creation relative to the chosen discount rate; it is not accounting profit or automatic approval to invest.
Discount rate: The required rate of return used to convert future cash flows into today’s value. A higher rate reduces the present value of a given future saving; it is distinct from electricity tariff escalation.
Sensitivity analysis and scenario: Sensitivity analysis tests how changing an assumption affects a result; a scenario is one set of assumed inputs. Each row here tests a different self-consumption rate for C while other inputs stay fixed, without predicting which rate will occur.
Crossover point: The input value at which two proposals have equal NPV and their ranking switches on either side. Here it concerns C versus B, not the point at which either proposal’s NPV becomes zero.
Self-consumption and load profile: Self-consumption is the proportion of solar electricity the factory uses when generated. Its load profile shows electricity demand over time, allowing demand to be matched against solar production.
Tariff escalation: The assumed increase in the electricity price from one year to the next. It raises the value of each kWh of avoided grid purchases in the model; it is not a forecast of South African tariffs.
Generation degradation: A gradual reduction in the electricity a solar system can generate as it ages. The supplied model applies an assumed annual reduction over its analysis period.

Further reading

ACCA — Investment appraisal
Further explanation of discounted cash flows and investment appraisal; the worked example goes beyond this course.
Read the resource ↗
Microsoft Support — Introduction to What-If Analysis
How changing inputs affects formula results; optional background on tools beyond the supplied sensitivity table.
Read the resource ↗
City of Cape Town — Going solar
Local guidance on solar photovoltaic generation and reducing grid electricity purchases.
Read the resource ↗