13. A new furnace for your small factory will cost $27,000 to install and will require ongoing maintenance expenditures of $1,500 a year. However, since it will be much more efficient than the furnace you have now, it will reduce your consumption of heating oil by 2,400 gallons per year. Heating oil is expected to cost on average $3.50 per gallon in the upcoming year, and that price is expected to increase by $0.50 each year for the two years that follow. From that point onwards, oil prices are expected 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 payback period of the investment? b) What is the discounted payback period of the investment? c) What is the NPV of the investment in the furnace? d) What is the IRR of the investment? e) Would you make this investment? Why?

14. Quick Computing currently sells 10 million computer chips each year at a price of $20 per chip. It is about to introduce a new chip, and it forecasts annual sales of 12 million of these improved chips at a price of $25 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 3 million per year. The old chip costs $6 each to manufacture, and the new ones will cost $8 each. What is the proper yearly cash flow one should use when evaluating the introduction of the new chip?

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