Question

A new furnace for your small factory will cost $34,000 and a year to install, will require ongoing maintenance expenditures of $2,200 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 3,100 gallons per year. Heating oil this year will cost $3 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 12%. a. What is the net 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.) c. 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.) e. What is the equivalent annual savings derived from the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.) f. 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 larger? NPV a. b. IRR Cumulative cash flows are positive in: Equivalent annual cost Equivalent annual savings Are the two measures the same or is one larger?

Answer 1

	Present Value of Cash Flow:
	(Cash Flow)/((1+i)^N)
	i=discount rate =12%=0.12
	N=Year of cash flow
	N	A	B	C=3100*B	D		PV=D/(1.12^N)
	Year	Investment	Cost of heating oil/gallon	Saving	Net Cash Flow	Cumulative Cash Flow	Present Value of Cash Flow
	0	($34,000)			($34,000)	($34,000)	($34,000)
	(INSTALLATION BY YEAR1)1				0	($34,000)	0
	2		$3.50	$10,850	$10,850	($23,150)	$8,650
	3		$4.00	$12,400	$12,400	($10,750)	$8,826
	4		$4.50	$13,950	$13,950	$3,200	$8,865
	5		$4.50	$13,950	$13,950	$17,150	$7,916
	6		$4.50	$13,950	$13,950	$31,100	$7,068
	7		$4.50	$13,950	$13,950	$45,050	$6,310
	8		$4.50	$13,950	$13,950	$59,000	$5,634
	9		$4.50	$13,950	$13,950	$72,950	$5,031
	10		$4.50	$13,950	$13,950	$86,900	$4,492
	11		$4.50	$13,950	$13,950	$100,850	$4,010
	12		$4.50	$13,950	$13,950	$114,800	$3,581
	13		$4.50	$13,950	$13,950	$128,750	$3,197
	14		$4.50	$13,950	$13,950	$142,700	$2,854
	15		$4.50	$13,950	$13,950	$156,650	$2,549
	16		$4.50	$13,950	$13,950	$170,600	$2,276
	17		$4.50	$13,950	$13,950	$184,550	$2,032
	18		$4.50	$13,950	$13,950	$198,500	$1,814
	19		$4.50	$13,950	$13,950	$212,450	$1,620
	20		$4.50	$13,950	$13,950	$226,400	$1,446
	21		$4.50	$13,950	$13,950	$240,350	$1,291
					SUM		$55,460
	NPV(Net Present Value)	$55,460
	IRR(Internal Rate of Return)	29.3%	(Using IRR function of excel over the Net Cash Flow)
	Cumulative Cash Flow is positive in	4	Years
	Equivalent Annual Cost(excluding ongoing maintenance expense)	($4,496)	(Using PMT function of excel with Rate=12%, Nper=21,Pv=34000)
	Equivalent Annual Saving	$7,334.04	(Using PMT function of excel with Rate=12%, Nper=21,Pv=-55460)
								Строага 19 IUNIL AlymeTIL I LUILITY G33 X for D EIRR(19:30) E A B C F H G ($34,000) L ($34, 0 (INSTALLATION BY YEAR1)1 $3.50 $4.00 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 $4.50 I J K ($34,000) ($34,000) 0 ($34,000) $10,850 $10,850 $23,150) $12,400 $12,400 $10,750) $13,950 $13,950 $3,200 $13,950 $13,950 $17,150 $13,950 $13,950 $31,100 $13,950 $13,950 $45,050 $13,950 $13,950 $59,000 $13,950 $13,950 $72,950 $13,950 $13,950 $86,900 $13,950 $13,950 $100,850 $13,950 $13,950 $114,800 $13,950 $13,950 $128,750 $13,950 $13,950 $142,700 $13,950 $13,950 $156,650 $13,950 $13,950 $170,600 $13,950 $13,950 $184,550 $13,950 $13,950 $198,500 $13,950 $13,950 $212,450 $13,950 $13,950 $226,400 $13,950 $13,950 $240,350 SUM $1, $1, $1, $55, NPV(Net Present Value) IRR(Internal Rate of Return) $55,460 29.3% (Using IRR function of excel over the Net Cash Flow) G35 : B fe D =PMT(12%,21,34000) E A C URBO Ova w H I J K LM $4.00 $12,400 $12,400 ($10,750) $8,826 $4.50 $13,950 $13,950 $3,200 $8,865 $4.50 $13,950 $13,950 $17,150 $7,916 $4.50 $13,950 $13,950 $31,100 $7,068 $4.50 $13,950 $13,950 $45,050 $6,310 $4.50 $13,950 $13,950 $59,000 $5,634 $4.50 $13,950 $13,950 $72,950 $5,031 $4.50 $13,950 $13,950 $86,900 $4,492 $4.50 $13,950 $13,950 $100,850 $4,010 $4.50 $13,950 $13,950 $114,800 $3,581 $4.50 $13,950 $13,950 $128,750 $3,197 $4.50 $13,950 $13,950 $142,700 $2,854 $4.50 $13,950 $13,950 $156,650 $2,549 $4.50 $13,950 $13,950 $170,600 $2,276 $4.50 $13,950 $13,950 $184,550 $2,032 $4.50 $13,950 $13,950 $198,500 $1,814 $4.50 $13,950 $13,950 $212,450 $1,620 $4.50 $13,950 $13,950 $226,400 $1,446 $4.50 $13,950 $13,950 $240,350 $1,291 SUM $55,460 $55,460 29.3% (Using IRR function of excel over the Net Cash Flow) 4 Years NPV(Net Present Value) IRR(Internal Rate of Return) Cumulative Cash Flow is positive in Equivalent Annual Cost(excluding ongoing maintenance expense) ($4,496)! (Using PMT function of excel with Rate=12%, Nper=21, Pv=34000) Clipboard Font Alignment Number Styles Cells Editing Ideas E B foc D =PMT(12%,21,-G32) E A C м H I J K $4.50 $13,950 $13,950 $17,150 $7,916 $4.50 $13,950 $13,950 $31,100 $7,068 $4.50 $13,950 $13,950 $45,050 $6,310 $4.50 $13,950 $13,950 $59,000 $5,634 $4.50 $13,950 $13,950 $72,950 $5,031 $4.50 $13,950 $13,950 $86,900 $4,492 $4.50 $13,950 $13,950 $100,850 $4,010 $4.50 $13,950 $13,950 $114,800 $3,581 $4.50 $13,950 $13,950 $128,750 $3,197 $4.50 $13,950 $13,950 $142,700 $2,854 $4.50 $13,950 $13,950 $156,650 $2,549 $4.50 $13,950 $13,950 $170,600 $2,276 $4.50 $13,950 $13,950 $184,550 $2,032 $4.50 $13,950 $13,950 $198,500 $1,814 $4.50 $13,950 $13,950 $212,450 $1,620 $4.50 $13,950 $13,950 $226,400 $1,446 $4.50 $13,950 $13,950 $240,350 $1,291 SUM $55,460 $55,460 29.3% (Using IRR function of excel over the Net Cash Flow) 4 Years $7,334.04| (Using PMT function of excel with Rate=12%, Nper-21, Pv=-55460) NPV(Net Present Value) IRR(Internal Rate of Return) Cumulative Cash Flow is positive in Equivalent Annual Cost