QUESTION 4

Smith is thinking of getting a new heating/cooling system even though the one he has now works fine. A new system will be 22% more efficient than his old one though. It will cost John $5,800 to have a new furnace installed. This past winter, John spent $3,200 on heating costs.

Required

a) Calculate the payback period in years (to the nearest two decimal places). Show all work.

b) Calculate the Accounting Rate of Return. Show all work.

c) As an alternative, Smith can increase the insulation in his house. This will cost only $2,000 and will result in 12% savings in heating costs. Which is the best investment for Smith to make and why?