Question

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

Answer 1

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