Joe Sharp heats his home with fuel oil. In an average winter he uses 800 gallons of oil. Joe read somewhere that it was his patriotic duty to reduce his fuel consumption by adding additional insulation to his house. Also, he thought it might save him some money. Two alternatives are available. Method 1 costs $2,000 and would reduce fuel consumption by 12 percent. Method 2 would cost $3,000 and would reduce his fuel consumption by 15 percent. Fuel oil costs $2.40 a gallon now. Assume a real discount rate of 3 percent and an increase of 1 percent per year in the real price of fuel oil. Joe expects to sell his house in 20 years and move to a warm climate.

1. Measure and compare the investment worth of both methods, using the following : payback, internal rate of return, net present value, equivalent annual return, and cost-benefit ratio.
2. which method of insulation do you think is better for Joe? Why?
3. which measure would you use to explain your preference to Joe? Why? (Assume that he is not familiar with any of the measures.)