Karen and Steve Catrow want to replace the windows in the older house they purchased recently. The company they have talked to about doing the work claims that new windows will reduce the couple’s heating and cooling costs by around 30 percent. The Catrows have heard from real estate agents that they will get back 70 percent of the cost of the new windows when they sell their house. The new windows will cost $30,000.
The heating and cooling costs for the Catrows’ house average around $5,000 per year, and they expect to stay in this house for 10 years. To pay for the windows they would have to withdraw the money from a mutual fund that has earned an average annual return of 3 percent over the past few years.
Required
a. From a financial planning perspective alone, determine whether or not the Catrows should purchase the replacement windows. Show supporting computations.
b. (Requirement b can only be solved with Excel, or similar software, or with a financial calculator.) Karen and Steve are not sure their mutual fund will continue to earn 3 percent annually over the next 10 years; therefore, they want to know the minimum return their fund would need to earn to make the new windows financially acceptable. Compute the internal rate of return for the replacement windows.
c. Identify some of the nonfinancial factors the couple may wish to consider in addition to the financial aspects of the decision above.