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Anewfurnaceforyoursmallfactorywillcost$27,000toinstallandwillrequireongoingmaintenanceexpendituresof$1,500ayear.However,sinceitwillbemuchmoreefficientthanthefurnaceyouhavenow,itwillreduceyourconsumptionofheatingoilby2,400gallonsperyear.Heatingoilisexpectedtocostonaverage$3.50pergallonintheupcomingyear,andthatpriceisexpectedtoincreaseby$0.50eachyearforthetwoyearsthatfollow.Fromthatpointonwards,oilpricesareexpectedtostabilizefortheforeseeablefuture.Thefurnacewilllastfor20years,atwhichpointitwillneedtobereplacedandwillhavenosalvagevalue.Thediscountrateis8%. What is the payback period of the investment? What is the discounted payback period of the investment? What is the NPV of the investment
- Anewfurnaceforyoursmallfactorywillcost$27,000toinstallandwillrequireongoingmaintenanceexpendituresof$1,500ayear.However,sinceitwillbemuchmoreefficientthanthefurnaceyouhavenow,itwillreduceyourconsumptionofheatingoilby2,400gallonsperyear.Heatingoilisexpectedtocostonaverage$3.50pergallonintheupcomingyear,andthatpriceisexpectedtoincreaseby$0.50eachyearforthetwoyearsthatfollow.Fromthatpointonwards,oilpricesareexpectedtostabilizefortheforeseeablefuture.Thefurnacewilllastfor20years,atwhichpointitwillneedtobereplacedandwillhavenosalvagevalue.Thediscountrateis8%.
- What is the payback period of the investment?
- What is the discounted payback period of the investment?
- What is the NPV of the investment in the furnace?
- What is the IRR of the investment?
- Would you make this investment? Why?
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