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3) A new furnace for your small factory will cost $41,000 and a year to install, will require ongoing maintenance expenditures of $3,500 a year

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3) A new furnace for your small factory will cost $41,000 and a year to install, will require ongoing maintenance expenditures of $3,500 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 3,800 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 10%.

 

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?

 

14) a. What is the present value of a 3-year annuity of $140 if the discount rate is 5%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the present value of the annuity in (a) if you have to wait an additional year for the first payment? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

15)Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $7,750. The grill will have no effect on revenues but will save Johnny's $15,500 in energy expenses. The tax rate is 30%.

Required:

a. What are the operating cash flows in each year?

b. What are the total cash flows in each year?

c. Assuming the discount rate is 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?