its market value at EOY four is $300, complete Table P5-24 below [values (a) thr

ID: 2464106 • Letter: I

Question

its market value at EOY four is $300, complete Table P5-24 below [values (a) through (f)], using an opportunity cost of 5% per year. Compute the equivalent uniform CR amount, using information from the completed table. A simple, direct space heating system is currently being used in a professional medical office complex. An upgraded "variable air-volume system" retrofit can be purchased and installed for $200,000 (investment cost). Its power savings in the future will be 500,000 kilo-Watt hours per year over its estimated life of 8 years. The cost of electricity is $0.10 per kilo-Watt hour. If the firm's cost of capital is 12% per year and the residual value of the system in 8 years is $20,000, should the new system be purchased? Use the present worth method.

Explanation / Answer

Cash Flows
($)

( Initial Cash Outflow)

200,000

(200,000)

(Annual Savings i.e. Cash Inflow = 500,000 Kwh x $ 0.10 per Kwh)

50,000

(Present Value Annuity Factor (12%, 8Years))

4.9676

248,380

(Residual Value at end of year 8)

20,000

(Present Value Factor (12%, 8th Year)

0.4039

8,078

Since, the Net Present Worth is positive i.e. the net benefit from purchase of "Variable Air-Volume System" is positive, then we can say the company should purchase the new system.

Period