Renovations costing $70,000 are being considered for the HVAC system in a commercial building. Energy savings are expected to be $14,500 annually. The business earns 16% on its current investments. Combined state and federal taxes are 48%, general inflation is expected to be 4%, property taxes are 2%, and fuel inflation is expected to be 5.5%. The utility will give a 2% rebate on the cost of the investment. Maintenance costs of new equipment will be 1.5% of the first cost. The equipment can be depreciated over five years. The company will accept a 10-year life for investment planning purposes.

a. Determine the life cycle savings of the investment.

b. Determine the maximum allowable cost of the equipment (zero life cycle savings). (Hint: When will NPV = 0?)

c. Plot the maximum allowable cost as a function of interest rate over the range 5% to 30%. (Hint: Plot NPV as a function of the interest rate)

Answer rating: 100% (QA)

a The life cycle savings of the investment is calculated using the following formula Li... View the full answer