Question
You own a boat and your are interested in replacing the heating system. You are faced with the following alternatives: 1) A solar system, which
You own a boat and your are interested in replacing the heating system. You are faced with the following alternatives:
1) A solar system, which will cost $12,000 to install and $500 in real terms at the end of every year to run, and will last forever (assume that your boat will too).
2) A gas-heating system, which will cost $5,000 to install and $1,000 fixed in nominal terms at the end of every year for the first 10 years and then $1,000 fixed in real terms at the end of every year for the last 10 years to run for a total of 20 years.
3) An oil-heating system, which will cost $3,500 to install and $1,200 in nominal terms at the end of every year to run, and will last 15 years.
The nominal discount rate is 10%, the rate of inflation is 2% and the real discount rate is 8%. Which of these three options is best for you? Please round all values to a nearest cent, i.e. $2.3572 = $2.36.
Please show all your steps and formula used. Thank you :)
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