A new furnace for your small factory will cost $36,000 to install and will requi

Question

A new furnace for your small factory will cost $36,000 to install and will require ongoing maintenance expenditures of $1,000 a year. But it is far more fuel efficient than your old furnace and will reduce your consumption of heating oil by 3,300 gallons per year. Heating oil this year will cost $2 a gallon; the price per gallon is expected to increase by $0.50 a year for the next 3 years and then to stabilize for the foreseeable future. The furnace will last for 20 years, at which point it will need to be replaced and will have no salvage value. The discount rate is 6%. a. What is the net present value of the investment in the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $ b. What is the IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.) IRR % c. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Payback period years d. What is the equivalent annual cost of the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Equivalent annual cost $ e. What is the equivalent annual savings derived from the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Equivalent annual savings $

Explanation / Answer

initial expenditure = $ 36000 expenditure on operating cost for 1st year = (-6600+1000)/1.06 ; expenditure on operating cost for 2nd year = (-8250+1000)/1.06 ^2; expenditure on operating cost for 3rd year = (-9900+1000)/1.06^3; expenditure on operating cost for 4th year = (-11550+1000)/1.06^4; expenditure on operating cost for 5th year = (-11550+1000)/1.06^5; expenditure on operating cost for 6th year = (-11550+1000)/1.06^6; expenditure on operating cost for 7th year = (-11550+1000)/1.06^7; expenditure on operating cost for 8th year = (-11550+1000)/1.06^8; expenditure on operating cost for 9th year = (-11550+1000)/1.06^9; expenditure on operating cost for 10th year = (-11550+1000)/1.06^10; expenditure on operating cost for 11th year = (-11550+1000)/1.06^11; expenditure on operating cost for 12th year = (-11550+1000)/1.06^12; expenditure on operating cost for 13th year = (-11550+1000)/1.06^13; expenditure on operating cost for 14th year = (-11550+1000)/1.06^14; expenditure on operating cost for 15th year = (-11550+1000)/1.06^15; expenditure on operating cost for 16th year = (-11550+1000)/1.06^16; expenditure on operating cost for 17th year = (-11550+1000)/1.06^17; expenditure on operating cost for 18th year = (-11550+1000)/1.06^18; expenditure on operating cost for 19th year = (-11550+1000)/1.06^19; expenditure on operating cost for 20th year = (-11550+1000)/1.06^20; NPV= -36000+ all above value b) IRR is rate at which NPV =0 ( do above calculations) c) Payback period is time when initial investment is recovered (while do above calculation u will get a point where it will happen that NPV will become positive from negative

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.