Question
In: Finance
A small company heats its building and spends $8,400 per year on natural gas for this...
A small company heats its building and spends $8,400 per year on natural gas for this purpose. Cost increases of natural gas are expected to be 8% per year starting one year from now (i.e., the first cash flow is $9,072 at EOY one). Their maintenance on the gas furnace is $345per year, and this expense is expected to increase by 12% per year starting one year from now (i.e., the first cash flow for this expense is $386.4 at the EOY one). If the planning horizon is 14 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest rate is 15% per year.
discrete compounding when iequals=8% per year.
discrete compounding when iequals=12
discrete compounding when iequals=15% per year.
Solutions
Expert Solution
| Rate | 8% | 12% | 15% |
| NPV | ($124,013.00) | ($95,321.38) | ($79,785.72) |
| Equivalent annual cost | $15,042.39 | $14,381.26 | $13,937.65 |
Workings
| Year | Naturalgas | Maintenance | Total cash flow |
| 1 | -9072 | -386.4 | -9458.4 |
| 2 | -9797.76 | -432.768 | -10230.5 |
| 3 | -10581.6 | -484.7 | -11066.3 |
| 4 | -11428.1 | -542.864 | -11971 |
| 5 | -12342.4 | -608.008 | -12950.4 |
| 6 | -13329.7 | -680.969 | -14010.7 |
| 7 | -14396.1 | -762.685 | -15158.8 |
| 8 | -15547.8 | -854.207 | -16402 |
| 9 | -16791.6 | -956.712 | -17748.4 |
| 10 | -18135 | -1071.52 | -19206.5 |
| 11 | -19585.8 | -1200.1 | -20785.9 |
| 12 | -21152.6 | -1344.11 | -22496.7 |
| 13 | -22844.8 | -1505.41 | -24350.2 |
| 14 | -24672.4 | -1686.05 | -26358.5 |
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