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You are considering installing an energy-efficient central heating system in your firms warehouse. The installation will cost

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You are considering installing an energy-efficient central heating system in your firm’s warehouse. The installation will cost $12,000, and you estimate total savings of $3,000 per year. The heating system will depreciate evenly over the next five years, at which point it must be replaced. The cost of capital is 8 percent. What do the NPV and EVA rules indicate about whether or not you should install the heating system?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Corporate Finance

Corporate Finance

ISBN: 978-0071339575

7th Canadian Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Ro

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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