A homeowner is considering whether to purchase an electric heat pump that would reduce the total fuel cost required to heat the home. The home is heated by natural gas. The heat pump is advertised to reduce fuel consumption an average of 10 MMBtu per month each over the 10-year expected life of the heat pump, but it costs $6,500 up front, and uses 10 kwh of electricity each month. The homeowner can get financing at an 8 percent annual rate, and electricity costs are expected to remain constant at 24 cents per kwh. Natural gas costs are expected to remain constant at $15 per MMBtu. (Suggestion: put these assumptions in a spreadsheet table to keep them straight.)

a. What is the annual fuel cost savings and annual reduction in kg of carbon dioxide emissions from operating the heat pump:

b. What is the levelized cost of the heat pump, including the cost of the electricity it uses? Comparing the levelized cost of the heat pump to the annual fuel cost savings, is the heat pump a financially sound investment:

c. Now suppose there is a carbon tax imposed of $50 per metric ton of CO2. Is the heat pump a financially sound investment now, considering the savings in avoided carbon taxes: