Question

The heat loss through the exterior walls of a certain poultry processing plant is estimated to cost the owner $3,000 next year. A salesman from Superfiber​ Insulation, Inc., has told​ you, the plant​ engineer, that he can reduce the heat loss by 80​% with the installation of $25,000 worth of Superfiber now. If the cost of heat loss rises by $190 per year​ (uniform gradient) after the next year and the owner plans to keep the present building for 15 more​ years, what would you recommend if the interest rate is 12​% per​ year?

Calculate: The present equivalent value of the savings equals $ ______ ?

Answer 1

Savings in the heat loss is 80% of 3000 which is $240. Now cost of heat loss is increased by $190 per year so the

saving will increase by 80% of this gradient which is $152 per year.

Present value of savings for 15 years = 240(P/A, 12%, 15) + 152(P/G, 12%, 15)

= 240*6.81086 + 152*32.92017

= $21,350

Since the cost of installation is $25000, savings are not worth enough for covering the cost. Hence the installation should be rejected.