Purchase of New Furnace: Different Capacities, Different Useful Lives ‘The Glen University is using a single gas-fired furnace at present, but owing to expected increases in consumption, it is considering the following alternatives:

a. Purchase a new electric furnace with double the capacity of the present furnace, and sell the present furnace.b. Purchase a new gas furnace similar to the present one, and operate the two gas furnaces. os.

The following information is available to aid in making the decision:

1. All furnaces are assumed to have a ten-year life with zero salvage value at the end of that time. - *

2. The old furnace had a cost of $4,000 four years ago. It can be sold outright for $2,400 cash. ;

3. The price of a new gas furnace is $4,680. This price is expected to increase at a rate of 4 percent compounded annually.

4. Repair and maintenance costs for a gas furnace used regularly during the year are $1,400 per year.

5. The price of a new electric furnace is $22,400; annual repair and maintenance costs are expected to be $1,200.

6. Comparative variable costs per charge (the unit of heating) are:

GAS ELECTRIC Purchased power source $ 6.80 $12.40 Supplies 2.60 1.20 Labor 10.60 4.40

$20.00 $18.00 7. Property taxes are estimated to be $150 per gas furnace and $700 per electric furnace per year.

8. Minimum desired rate of return is 6 percent.

9. It is estimated that machine usage over the next ten years will be at the rate of 700 units (charges) per year.

To ease computations, round off all factors from the compound-interest tables to two decimal places.

. The “payout” or “payback” time. The payback reciprocal. What can you conclude from the reciprocal?

. The net present value of the electric furnace.

. Indicate for each of the following whether the use of the gas-furnace system would become more or less desirable. Justify your answer by a one-sentence explanation.

(1) Property tax rates advance.

(2) New labor contract raises wage rates.

(3) Interest rates advance.

(4) Demand for product increases, so that machine usage is increased to 800 units.

(5) The Federal Power Commission authorizes an increase in natural-gas rates.  L01