You own a house and you are considering installing a solar powered water heater

Question

You own a house and you are considering installing a solar powered water heater on your roof top. The contractor gives you the following estimates. The costs of the solar water heater including all installation and piping is $4000. However, your get a tax credit of $1500 the year after install the solar water heater; that is you get to reduce your total tax payable by $1500 that year. The solar water heater has a life of five years. Installing the water heater will reduce your annual natural gas consumption by 120 Mcf. The price of natural gas is $8/Mcf and is expected to remain at that level for next 5 years. If the best investment alternative available to you earns a return of 10% per year, should you invest in the solar water heater? Justify your answer.

Explanation / Answer

Investment amount= 4000 $

Tax credit= 1500 $

Saving on natural gas consumption = 120*8 = 960 $

Total return = 1500 + 960 = 2460 $

Alternate investment = Amount = 4000(1.10)5

= 6442.04

Return on investment = 6442.04-4000 = 2442.04 $

Yes, should invest in the solar water heater.

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