Peter is a salesman for Kroner industries which specializes in making of natural
ID: 2650454 • Letter: P
Question
Peter is a salesman for Kroner industries which specializes in making of natural gas furnaces. Peter has told you that your current furnace needs to be replaced and he offers the following choices.
Choice L (Low efficiency furnace):Initial cost is $3,150 including complete installation.
Choice M (Medium efficiency furnace): Initial cost is $4,050 including complete installation.
Choice H (High efficiency furnace): Initial cost is $7,350 including complete installation.
Assume that all the furnaces have a life of 10 years.Your heating costs are expected to increase at an average rate of 4% per year.If you were to install furnace L, your first year heating cost is expected to be $2,175.Furnace M is relatively more efficient than furnace L and therefore the first year heating bill is expected to be $1,950.Furnace H is relatively more efficient than furnace L or M; and therefore the first year heating bill is expected to be $1,850.
Money is worth 7% per year
What is the annual equivalent cost of operating the three types of furnaces?
Explanation / Answer
Answer
Choice L
Figures in $
Year
Initial cost
Heating cost
Total cash outflow
Disc Rate - 7%
Present value
with 4% increase
C
D
C*D
A
B
A+B
0
3150
0
3150.00
1
3150
1
0
2175
2175.00
0.93
2032.71
2
0
2262
2262.00
0.87
1975.72
3
0
2352.48
2352.48
0.82
1920.32
4
0
2446.58
2446.58
0.76
1866.48
5
0
2544.44
2544.44
0.71
1814.15
6
0
2646.22
2646.22
0.67
1763.29
7
0
2752.07
2752.07
0.62
1713.85
8
0
2862.15
2862.15
0.58
1665.80
9
0
2976.64
2976.64
0.54
1619.09
10
0
3095.70
3095.70
0.51
1573.70
Total present cash outflow (a)
21095.12
No. Of years (b)
10
Annual equivalent cost (a/b)
2109.51
Choice M
Figures in $
Year
Initial cost
Heating cost
Total cash outflow
Disc Rate - 7%
Present value
with 4% increase
C
D
C*D
A
B
A+B
0
4050
0
4050
1
4050
1
0
1950
1950
0.93
1822.43
2
0
2028
2028
0.87
1771.33
3
0
2109.12
2109.12
0.82
1721.67
4
0
2193.48
2193.48
0.76
1673.40
5
0
2281.22
2281.22
0.71
1626.48
6
0
2372.47
2372.47
0.67
1580.88
7
0
2467.37
2467.37
0.62
1536.56
8
0
2566.07
2566.07
0.58
1493.47
9
0
2668.71
2668.71
0.54
1451.60
10
0
2775.46
2775.46
0.51
1410.90
Total present cash outflow (a)
20138.73
No. Of years (b)
10
Annual equivalent cost (a/b)
2013.87
Choice H
Figures in $
Year
Initial cost
Heating cost
Total cash outflow
Disc Rate - 7%
Present value
with 4% increase
C
D
C*D
A
B
A+B
0
7350
0
7350
1
7350
1
0
1850
1850
0.93
1728.97
2
0
1924
1924
0.87
1680.50
3
0
2000.96
2000.96
0.82
1633.38
4
0
2081.00
2081.00
0.76
1587.58
5
0
2164.24
2164.24
0.71
1543.07
6
0
2250.81
2250.81
0.67
1499.81
7
0
2340.84
2340.84
0.62
1457.76
8
0
2434.47
2434.47
0.58
1416.89
9
0
2531.85
2531.85
0.54
1377.16
10
0
2633.13
2633.13
0.51
1338.55
Total present cash outflow (a)
22613.66
No. Of years (b)
10
Annual equivalent cost (a/b)
2261.37
Choice L
Figures in $
Year
Initial cost
Heating cost
Total cash outflow
Disc Rate - 7%
Present value
with 4% increase
C
D
C*D
A
B
A+B
0
3150
0
3150.00
1
3150
1
0
2175
2175.00
0.93
2032.71
2
0
2262
2262.00
0.87
1975.72
3
0
2352.48
2352.48
0.82
1920.32
4
0
2446.58
2446.58
0.76
1866.48
5
0
2544.44
2544.44
0.71
1814.15
6
0
2646.22
2646.22
0.67
1763.29
7
0
2752.07
2752.07
0.62
1713.85
8
0
2862.15
2862.15
0.58
1665.80
9
0
2976.64
2976.64
0.54
1619.09
10
0
3095.70
3095.70
0.51
1573.70
Total present cash outflow (a)
21095.12
No. Of years (b)
10
Annual equivalent cost (a/b)
2109.51
Choice M
Figures in $
Year
Initial cost
Heating cost
Total cash outflow
Disc Rate - 7%
Present value
with 4% increase
C
D
C*D
A
B
A+B
0
4050
0
4050
1
4050
1
0
1950
1950
0.93
1822.43
2
0
2028
2028
0.87
1771.33
3
0
2109.12
2109.12
0.82
1721.67
4
0
2193.48
2193.48
0.76
1673.40
5
0
2281.22
2281.22
0.71
1626.48
6
0
2372.47
2372.47
0.67
1580.88
7
0
2467.37
2467.37
0.62
1536.56
8
0
2566.07
2566.07
0.58
1493.47
9
0
2668.71
2668.71
0.54
1451.60
10
0
2775.46
2775.46
0.51
1410.90
Total present cash outflow (a)
20138.73
No. Of years (b)
10
Annual equivalent cost (a/b)
2013.87
Choice H
Figures in $
Year
Initial cost
Heating cost
Total cash outflow
Disc Rate - 7%
Present value
with 4% increase
C
D
C*D
A
B
A+B
0
7350
0
7350
1
7350
1
0
1850
1850
0.93
1728.97
2
0
1924
1924
0.87
1680.50
3
0
2000.96
2000.96
0.82
1633.38
4
0
2081.00
2081.00
0.76
1587.58
5
0
2164.24
2164.24
0.71
1543.07
6
0
2250.81
2250.81
0.67
1499.81
7
0
2340.84
2340.84
0.62
1457.76
8
0
2434.47
2434.47
0.58
1416.89
9
0
2531.85
2531.85
0.54
1377.16
10
0
2633.13
2633.13
0.51
1338.55
Total present cash outflow (a)
22613.66
No. Of years (b)
10
Annual equivalent cost (a/b)
2261.37
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