Answer:
Net present value is $61,058.
Step-by-step explanation:
Net present value is the difference between present value of cash inflows and the present value cash outflows over the period of time. NPV method is used in capital budgeting to analyze profitability of the project.
Less: initial cost is $29,000
Add: Year 1: Cost saving due to new furnace is $5,600 (2,800 oil gallons * $ 2 per gallon)
Year 2: Cost saving due to new furnace is $7,000 (2,800 oil gallons * $ 2.50 per gallon)
Year 3- 20: Cost saving due to new furnace is $8,400 (2,800 oil gallons * $ 3 per gallon)
Less : Maintenance expenditure is $1,200
The furnace will benefit for 20 years and the price per gallon will increase by $0.50 year.
The annuity factor is applied at discount factor of 6% and then present value of each cash inflow and outflow is calculated. The net present value is $61,058.
