If you insulate your office for $16,000, you will save $1,600 a year in heating expenses....

If you insulate your office for $16,000, you will save $1,600 a year in heating expenses. These savings will last forever. a. What is the NPV of the investment when the cost of capital is 5%? 10%? ... b. What is the IRR of the investment? (Enter your answer as a whole percent.) IRR= ?? % c. What is the payback period on this investment? Payback Period= ?? Years

Expert Solution

a.
	NPV-5%		$ 16,000
	NPV-10%		0

	Working:

	NPV-5%:

	Present Value of savings			$ 1,600	/	5%	=	$ 32,000
	Less: Initial Cost							$ 16,000

	NPV							$ 16,000

	NPV-10%:

	Present Value of savings			$ 1,600	/	10%	=	$ 16,000
	Less: Initial Cost							$ 16,000

	NPV							0

b.
	IRR	10%

	IRR is the rate at which NPV is zero.At 10%, NPV is zero.So, IRR is 10%.

c.
	Payback period		10 Years

	Working:


	Payback period		=	Initial Costs / Annual Saving
			=	$ 16,000	/	$ 1,600
			=	10	Years

jeff jeffy answered 2 years ago

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