**Understanding Investment in a New Furnace**A new furnace for your small factory will cost $47,000 and will require ongoing maintenance expenditures of $1,500 per year. However, it is more fuel-efficient, reducing heating oil consumption by 4,400 gallons annually. Current heating oil costs $2 per gallon, and the price per gallon is expected to increase by $0.50 annually for the next 3 years before stabilizing. The furnace has a lifespan of 20 years with no salvage value. The discount rate is 8%.**Questions for Analysis:**a. **Net Present Value (NPV):** Calculate the NPV of the furnace investment. (Round to the nearest whole dollar.)b. **Internal Rate of Return (IRR):** Determine the IRR and express it as a percent rounded to 2 decimal places.c. **Payback Period:** Calculate the period over which cumulative cash flows are positive. (Round to 2 decimal places.)d. **Equivalent Annual Cost:** Compute the equivalent annual cost of the furnace. (Round to 2 decimal places.)e. **Equivalent Annual Savings:** Determine the equivalent annual savings derived from the furnace. (Round to 2 decimal places.)f. **Comparison of PV Measures:** Compare the present value of the difference between equivalent annual cost and savings with the answer to part (a). Determine if one is larger or if they are the same.**Data Table:**- **a.** NPV: - **b.** IRR: % - **c.** Cumulative cash flows are positive in: - **d.** Equivalent annual cost:- **e.** Equivalent annual savings:- **f.** Are the two measures the same or is one larger?

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A new furnace for your small factory will cost $47,000 and a year to install, will require ongoing maintenance expenditures of $1,500 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 4,400 gallons per year. Heating oil this year will cost $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, at which point it will need to be replaced and will have no salvage value. The discount rate is 8%. a. What is the net present value of the investment in the furnace? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.) b. What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A new furnace for your small factory will cost $47,000 and a year to install, will require ongoing maintenance expenditures of $1,500 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 4,400 gallons per year. Heating oil this year will cost $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, at which point it will need to be replaced and will have no salvage value. The discount rate is 8%. a. What is the net present value of the investment in the furnace? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.) b. What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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on As a financial manager, you are considering purchasing a new machine that will cost $1 million. It can be depreciated on a straight- line basis for five years to a zero salvage value. You expect revenues from the machine to be $700,000 each year and expenses are expected to be 50% of revenue. Working capital is expected to be 30% of the revenue the following year. If the company is taxed at a rate of 34% and the appropriate discount rate for a project of this level of risk is 12%, will the company invest in this new machine?
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