Question: A client is considering replacing his heating system. System A is the standard scheme whereas system B relies on additional insulation being provided. Evaluate the

A client is considering replacing his heating system. System A is the standard scheme whereas system B relies on additional insulation being provided. Evaluate the alternatives and make a recommendation.

Initial costs System A System B

£ £

Boiler 160,000 175,000 Pipework and units 48,000 42,000 Insulation 12,000 32,000 Recurring costs £ £
Repairs 3,000 per annum 2,800 per annum Replacement 40,000 (every 20 years) 32,000 (every 30 years)
Overhaul 15,000 (every 5 years) 15,000 (every 10 years)
Fuel 15,000 per annum 11,000 per annum The expected life of each building is 60 years and the discount rate to be used is 4 per cent.
For the present value of a single sum and the present value of an annuity see Parry’s Valuation and Investment Tables (Davidson, 2013).

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