Question

A new furnace for your small factory will cost $29.000 and a year to install will require ongoing maintenance expenditures of $1.200 a year. But it is far more fuel-efficient than your old fumace and will reduce your consumption of heating oil by 2.800 gallons per year Heating oil this year will cost $2 a gallon, the price per gallon is expected to increase by $0.50 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 6% a. What is the nel present value of the investment in the furnace? Do not round intermediate calculations. Round your answer to the nearest whole dollar.) b. What is the IRR (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places) G. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. What is the equivalent annual cost of the furnace? Do not round intermediate calculations. Round your answer to 2 decimal places) .. What is the equivalent annual savings derived from the fumace? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Compare the PV of the difference between the equivalent annual cost and savings to your answer to part (a). Are the two measures the same or is one larget? NPV Cumulative cash flows are positive in Equivalent annual cos Equivalent anual savings Are the two the same risoner? Prey 1 of 5 Next >

Answer 1

You have asked so many questions in the same post. I have addressed the first four. Please post the balance questions in a separate post.

Please see the table below. Please be guided by the second row to understand the mathematics. The last two rows highlighted in yellow contain your answers for part (a) and part (b). Subsequent parts have been answered after the table. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

2.50 E F G H Maintenance Price per Year Cumulative cash Savings Net cash flows cash flows cash flows gallon flows 85 DE CX 2800 E = A + B +D Cumulative of E 86 01 (29,000) (29,000) (29,000) 87 11 - (1,200) 7,000 5,800 (23,200) 88 21 - (1,200) 3.00 8,400 7,200 (16,000) 893 - (1,200) 3.50 9,800 8,600 (7,400) 90 4 . (1,200) 3.50 9,800 8,600 1,200 91 5 - (1,200) 3.50 9,800 8,600 9,800 92 6 . (1,200) 3.50 9,800 8,600 18,400 93 7 . (1,200) 3.50 9,800 8,600 27,000 948 (1,200) 3.50 9,800 8,600 35,600 95 9 . (1,200) 3.50 9,800 8,600 44,200 96 101 - (1,200) 3.50 9,800 8,600 52,800 97 11 - (1,200) 3.50 9,800 8,600 61,400 12 (1,200) 3.50 9,800 8,600 70,000 13 - (1,200) 3.50 9,800 8,600 78,600 14 (1,200) 3.50 9,800 8,600 87,200 101 15 - (1,200) 3.50 9,800 8,600 95,800 16 . (1,200) 3.50 9,800 8,600 104,400 103 17 (1,200) 3.50 9,800 8,600 113,000 18 (1,200) 3.50 9,800 8,600 121,600 105 19 - (1,200) 9,800 8,600 130,200 20 (1,200) 9,800 8,600 138,800 107 108 Part (a) NPV | 65,754 "=NPV(6%,J87:J106)+386 109 Part (b) IRR 26.56% =IRR(186:106) 2 102 3.50 106

Part (c) Look at the last column. Cumulative cash flows turn positive between year 3 and 4. Hence, payback period = 3 + 7,400 / 8,600 = 3.86 years

Part (d)

EAC = Annual maintenance cost + equivalent annual cost of the initial investment = 1,200 + PMT (Rate, Nper, PV) = 1,200 + PMT (6%, 20, -29000) = 1,200 + $2,528.35 = $  3,728.35