A new furnace for your small factory is being installed right now, will cost $33,000, and will be completed in one year. At that point, it will require ongoing maintenance expenditures of $1,000 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 3,000 gallons per year. Heating oil this year costs $2 a gallon; the price per gallon is expected to increase by $0.50 a year for the next 3 years and then to stabilize for the foreseeable future. The furnace will last for 20 years from initial use, at which point it will need to be replaced and will have no salvage value. (Specifically, the firm pays for the furnace at time 0, and then reaps higher net cash flows from that investment at the end of years 1 – 20.). The discount rate is 10%.
A new furnace for your small factory is being installed right now, will cost $33,000, and will be completed in one year. At that point, it will require ongoing maintenance expenditures of $1,000 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 3,000 gallons per year. Heating oil this year costs $2 a gallon; the price per gallon is expected to increase by $0.50 a year for the next 3 years and then to stabilize for the foreseeable future. The furnace will last for 20 years from initial use, at which point it will need to be replaced and will have no salvage value. (Specifically, the firm pays for the furnace at time 0, and then reaps higher net cash flows from that investment at the end of years 1 – 20.). The discount rate is 10%.
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