A new furnace for your small factory will cost $27,000 a year to install and will require

Question:

A new furnace for your small factory will cost $27,000 a year to install and will require ongoing maintenance expenditures of $1,500 a year. But it is far more fuel- efficient than your old furnace and will reduce your consumption of heating oil by 2,400 gallons per year. Heating oil this year will cost $3 a gallon; the price per gallon is expected to increase by $.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 8%.

a. What is the net present value of the investment in the furnace?

b. What is the IRR?

c. What is the payback period?

d. What is the equivalent annual cost of the furnace?

e. What is the equivalent annual savings derived from the furnace?

f. Compare the PV of the difference between the equivalent annual cost and savings to your answer to part (a).

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...