You've read about the change in the Arctic jet stream bringing colder winters and hotter summers to New Jersey. You also believe that world events will continue to cause higher prices for heating and cooling your home.

Your estimates of your annual utility bill (for heating and cooling) if you do nothing:

Year	1	2	3	4	5	6	7	8	9	10
	$8,350	$8,993	$9,712	$10,538	$11,455	$12,486	$13,672	$14,971	$16,393	$17,950

You've contacted a reputable contractor about upgrading your homes heating and air-conditioning systems.

The contractor's proposal to install a premium heating and cooling system. The system has an excellent performance rating by independent experts.

Installation (Year 0) Spending

$27,750

Estimated Annual Utility Bill with Upgrade

Year	1	2	3	4	5	6	7	8	9	10
	$5,425	$5,845	$6,315	$6,850	$8,020	$8,740	$9,570	$11,525	$12,620	$13,820

You have the cash available to make the investment and you expect to remain in the house for at least 10 years.

(1) What are the risks you need to account for?

To evaluate your decision you decide to use a 6% required rate of return

(2) How might you have decided to use this required rate of return?

(3) Should you upgrade? (Use financial criteria only)

(4) What else might you consider doing?

Your spouse/significant other/partner believes it is more likely you would move after 5 years rather than stay in the house for the 10 years you assumed.

That is, you would sell your current house after five years and purchase a new house.

(5) What required rate of return would you use here? Choose one of the following and explain your choice.

4%

6%

8%

(6) How does changing the forecast from 5 years to 10 years effect your decision?

Use the required rate of return you selected above.

(7) What else should this analysis take into account?

(Hint: Benefits of upgrade are expected to last 10 years.)