1) Glasgow University currently uses gas fired heating but which uses a reliable but elderly boiler which is significantly less fuel efficient than its modern equivalent. Current Labour costs are 0.2 million per year at year 0 prices and current energy costs are 2 million per year at year 0 prices. Labour costs are expected to rise at 4% per year in nominal terms whereas gas prices are expected to rise by 3% in real terms. A boiler replacement which would cost 10.0 million in year 0 prices, would result in a 20% reduction in annual gas consumption and could however be immediately installed to replace the existing facility. It would also reduce labour costs to 0.12 million per year at year 0 prices .In addition the university has to replace the associated distribution pipe work at cost of 1million irrespective of whether or not a new boiler is to be installed. The evaluation is to be carried out over a 16 year period, stating clearly all assumptions you rely upon.

a) Draw the cash flow diagrams for continuing with the existing set up and for the replacement boiler option in both real and nominal terms thus 4 cash flow diagrams . b) If the nominal discount rate is 8% and general inflation is forecast to be 3%/year would you recommend the boiler replacement to be made and if so why ? For calculations the simplified version of the Fisher Equation may be used but this approximation should be explained. c) What % price change for the new boiler would result in a zero NPV for its adoption ? d) What is the IRR of the boiler replacement project. e) What would be the NPV if an infinite lifetime was assumed for the boiler replacement project? f). Briefly explain the implications on results of using the simplified version of the Fisher Eqt. [60%]