Peter is a salesman for Kroner industries which specializes in making of natural

Question

Peter is a salesman for Kroner industries which specializes in making of natural gas furnaces. Peter has told you that your current furnace needs to be replaced and he offers the following choices. All furnaces have a useful life of 10 years.

Choice L (Low efficiency furnace)

Initial cost is $2,100 including complete installation.

Heating cost is expected to be $1,450 and increasing at 4% every year.

Choice M (Medium efficiency furnace)

Initial cost is $2,700 including complete installation.

Heating cost is expected to be $1,300 and increasing at 4% every year.

Choice H (High efficiency furnace)

Initial cost is $4,000 including complete installation.

Heating cost is expected to be $1,150 and increasing at 4% every year.

         

Which furnace will you choose? Why? Use net annual cost to determine the best alternative.

Use interest rate of 8% per year.

Explanation / Answer

Total Cost

Advice: It is better to choose M as its cost is low from rest of other.

   13,037.86

Choice L Choice M Choice H Year Amount PV@8% PVAF Year Amount PV@8% PVAF Particular Year Amount PV@8% PVAF Initial Cost          2,100 1 2100 Initial Cost    2,700.00         1.000      2,700.00 Initial Cost    4,000.00         1.000      4,000.00 Heating Cost 1          1,450         0.926 1342.593 Heating Cost 1    1,300.00         0.926      1,203.70 Heating Cost 1    1,150.00         0.926      1,064.81 2          1,508         0.857 1292.867 2    1,352.00         0.857      1,159.12 2    1,196.00         0.857      1,025.38 3          1,568         0.794 1244.983 3    1,406.08         0.794      1,116.19 3    1,243.84         0.794          987.40 4          1,631         0.735 1198.872 4    1,462.32         0.735      1,074.85 4    1,293.59         0.735          950.83 5          1,696         0.681 1154.47 5    1,520.82         0.681      1,035.04 5    1,345.34         0.681          915.61 6          1,764         0.630 1111.712 6    1,581.65         0.630          996.71 6    1,399.15         0.630          881.70 7          1,835         0.583 1070.537 7    1,644.91         0.583          959.79 7    1,455.12         0.583          849.05 8          1,908         0.540 1030.888 8    1,710.71         0.540          924.24 8    1,513.32         0.540          817.60 9          1,984         0.500 992.7066 9    1,779.14         0.500          890.01 9    1,573.85         0.500          787.32 10          2,064         0.463 955.9397 10    1,850.31         0.463          857.05 10    1,636.81         0.463          758.16 Total Cost 13495.57

Total Cost

Advice: It is better to choose M as its cost is low from rest of other.

   12,916.72 Total Cost

   13,037.86

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