Answer:
Retrofitted Space-Heating System
Benefit-Cost Ratio = $75,420/$121,521
= 0.6206
= 0.62
Benefit is less than 1. Therefore, project will not deliver positive NPV.
Recommendation:
It is better and cheaper to incur electricity costs than to purchase the retrofitted space-heating system. The retrofitting benefit does not justify the cost of the project.
Explanation:
a) Data and Calculations:
Purchase cost of system = $125,000
Salvage value (PV of $7,000 in five years) = $3,479
Total cost of project = $121,521 ($125,000 - 3,479)
Benefit of Project = Savings in 250,000 kWh annually
Cost of a kilowatt-hour = $0.09
Total annual cost of electricity = $22,500 (250,000 * $0.09)
Annuity Factor for 5 years = 3.352
Present value of annuity of $22,500 = $75,420 ($22,500 * 3.352)
Benefit-Cost = $75,420/$121,521
= 0.6206
= 0.62
