Peter is a salesman for Kroner industries which specializes in making of natural gas furnaces. Peter...

Peter is a salesman for Kroner industries which specializes in making of natural gas furnaces. Peter has told you that your plant’s furnace needs to be replaced and he offers the following choices. All furnaces have a useful life of 10 years. Choice L (Low efficiency furnace) Initial cost is $28,000 including complete installation. Heating cost is expected to be $7,450 and increasing at 2.5% every year. Choice M (Medium efficiency furnace) Initial cost is $35,000 including complete installation. Heating cost is expected to be $6,100 and increasing at 2.5% every year. Choice H (High efficiency furnace) Initial cost is $45,000 including complete installation. Heating cost is expected to be $5,000 and increasing at 2.5% every year.

Expert Solution

We will find out the NPV of the cost for each of the three alternatives and choose the one with the least NPV cost. Please order to find the NPV, we need a discount rate. There is no mention of discount rate in the question. I will therefore assume the same to be r = 10%.

Please see the table below. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Choice M has the least NPV of the cost and hence Choice M (Medium efficiency furnace) should be chosen.

jeff jeffy answered 2 months ago

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