5. A new furnace will cost $27,000 to install and will require maintenance of $1

Question

5. A new furnace will cost $27,000 to install and will require maintenance of $1,500 a year. But it is more efficient than your old furnace and will reduce your heating oil consumption by 2400 gallons per year. Heating oil this year will cost $2 per gallon; the price per gallon is expected to increase by $.5 per 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 8%. a) What is the NPV of the investment in the furnace b) What is the IRR (c) What is the payback period and discounted payback period? d) What is the constant annual-equivalent cash flow?

Explanation / Answer

A new furnance will cost

Now the NPV os 45489 = 9.82*x

=45489/9.82 =4633.23

Cost per gallon 2 2.5 3 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Savings 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 2400 Total Savings 4800 6000 7200 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 -27000 4800 6000 7200 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 8400 NPV 45,489.72 26400 27000 IRR 26.02% 600 Pay back period 4.07

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