Question
In: Accounting
A retrofitted space-heating system is being considered for a small office building. The system can be...
A retrofitted space-heating system is being considered for a small office building. The system can be purchased and installed for $110,000, and it will save an estimated 300,000 kilowatt-hours (kWh) of electric power each year over a six-year period. A kilowatt-hour of electricity costs $0.10, and the company uses a MARR of 15% per year in its economic evaluations of refurbished systems. The market value of the system will be $8,000 at the end of six years, and additional annual operating and maintenance expenses are negligible.
a. Use the NPV method to determine whether this system should be installed. A cash flow diagram must also be included.
Solutions
Expert Solution
NET PRESENT VALUE METHOD MEANS TO FIND OUT WHETHER AT CURRENT SITUATION CASH INFLOW INCREASES FROM CASH OUTFLOW TO FIND OUT WHETHER DEVICE IS INSTALLED OR NOT.
IT IS POSSIBLE THAT ALL BENEFITS SHOULD NOT BE RECEIVED IN
CURRENT YEAR SO WE HAVE TO USE MARR RATE FOR CALCULATING BENEFIT
FOR CURRENT YEAR. WE CAN COMPARE 2 VALUE ONLY WHEN THEY ARE ON SAME
YEAR.
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