Question

Wok & Roll is planning to introduce their Rockin’ Chinese cuisine to the Memphis area. One of their restaurants is being designed for a strip mall in Germantown. For this location, the heat loss in the winter and heat gain in the summer is anticipated to cost $3,000 at the end of next year. A salesperson from Superfiber Insulation, Inc., has told the design engineers for Wok & Roll that the cost can be reduced by 75% with the installation of $28,000 worth of Superfiber now. Assume that the energy costs will increase by $250 next year and thereafter for a total of fourteen years. Wok & Roll plans to use this location for the next fifteen years. Wok & Roll requires a MARR of 8% per year for all of their locations. Should the engineers recommend the purchase of the Superfiber Insulation? Explain your answer. Include a cash flow diagram with your solution.

Answer 1

Annual energey saving = Annual energy cost x 75%

Present worth (PW) of the project is computed as follows.

EOY	First Cost ($)	Enery Cost ($)	Energy Saving ($)	Net Benefit ($)	PV Factor @8%	Discounted Net Benefit ($)
	(A)	(B)	(C)=(B)x0.75	(D)=(C)-(A)	(E)	(D)x(E)
0	28,000			-28,000	1.0000	-28,000
1		3,000	2,250	2,250	0.9259	2,083
2		3,250	2,438	2,438	0.8573	2,090
3		3,500	2,625	2,625	0.7938	2,084
4		3,750	2,813	2,813	0.7350	2,067
5		4,000	3,000	3,000	0.6806	2,042
6		4,250	3,188	3,188	0.6302	2,009
7		4,500	3,375	3,375	0.5835	1,969
8		4,750	3,563	3,563	0.5403	1,925
9		5,000	3,750	3,750	0.5002	1,876
10		5,250	3,938	3,938	0.4632	1,824
11		5,500	4,125	4,125	0.4289	1,769
12		5,750	4,313	4,313	0.3971	1,713
13		6,000	4,500	4,500	0.3677	1,655
14		6,250	4,688	4,688	0.3405	1,596
15		6,500	4,875	4,875	0.3152	1,537
					PW ($) =	237

Since PW of net benefit is positive, engineers should recommend the purchase.

Cash flow diagram as follows (All values in $).