Accounting

A new furnace for your small factory will cost $43,000 a year to install and will require ongoing maintenance expenditures of $4,000 a year. But it is far more fuel efficient than your old furnace and will reduce your consumption of heating oil by 4,000 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 8%.

 

 

a.What is the net present value of the investment in the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

NPV = $  _________________

 

 

b.What is the IRR? (Do not round intermediate calculations.Round your answer to 2 decimal places.)

 

 

IRR = _____________%

 

 

c.What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

Payback period = __________years

 

 

d.What is the equivalent annual cost of the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

Equivalent annual cost = $  ______________

 

Solution:

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