Your firm wants to replace the furnace in the building with a more energy-efficient unit that has a two-year lifetime. Suppose the new furnace will cost $10,000 right now. In each year of operation, the new furnace will save the firm $5500 in energy expense. If the interest rate is 10%, the firm _ buy the new furnace because the net present value is _.
a. should; +$1,000
b. should; $0
c. should not; -$5,000
d. should not; -$454.55
e. should not; -$1,000
d. should not; -$454.55

Question

06-12-2022
Business

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Your firm wants to replace the furnace in the building with a more energy-efficient unit that has a two-year lifetime. Suppose the new furnace will cost $10,000 right now. In each year of operation, the new furnace will save the firm $5500 in energy expense. If the interest rate is 10%, the firm _ buy the new furnace because the net present value is _.
a. should; +$1,000
b. should; $0
c. should not; -$5,000
d. should not; -$454.55
e. should not; -$1,000
d. should not; -$454.55

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rafikiedu08 rafikiedu08 · Answer 1 · 2022-12-13T08:56:54+01:00

If the interest rate is 10%, the firm should not buy the new furnace because the net present value is -$454.55.

The corporation desires to replace the building's two-year-old furnace with one that is more energy-efficient. Let's assume that the new furnace now costs $10,000.

The new furnace will save the business $5500 year on energy bills. If the interest rate is 10%, the new furnace's net present value is -$454.54, hence the business shouldn't buy it.

The difference between the interest rate a bank charges depositors and the interest rate it obtains on consumer loans is known as the net interest rate spread. The profitability of a bank is significantly impacted by the net interest rate spread. The net interest rate can be thought of as a profit margin.

Interest rate of 10%

Divided by (1+10%), net present value is equal to -10,001 plus 5,500.

= 2

NPV = - $ 454.54

Since the new equipment has a $454.54 negative net present value, the corporation shouldn't buy it.

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