1. Peter is a salesman for Kroner industries which specializes in making of natural gas furnaces. Peter has told you that your current furnace needs to be replaced and he offers the following choices. All furnaces have a useful life of 15 years.

Choice L (Low efficiency furnace)

Initial cost is $2,100 including complete installation.

Heating cost is expected to be $1,450 and increasing at 4% every year.

Choice M (Medium efficiency furnace)

Initial cost is $2,700 including complete installation.

Heating cost is expected to be $1,300 and increasing at 4% every year.

Choice H (High efficiency furnace)

Initial cost is $4,000 including complete installation.

Heating cost is expected to be $1,150 and increasing at 4% every year.

Which furnace will you choose? Why? Use interest rate of 8% per year compounded quarterly.

Hints:

• For each choice, capture all the cash flows and compute NPV or NFV or NAV to make your decision
• Did you use the right interest rate? As given or convert to EAR?
• Do you understand formula 8