homework, finance, interest-ratesA company which owns and operates a large city centre hotel is considering installing a new heating system. The annual fuel and maintenance cost of the present system is £50,000. The new system will cost £250,000 to install and its annual fuel and maintenance costs will be £20,000. If the company installed improved insulation in the hotel, at a cost of £39,000, at the same time as replacing the heating system, the annual fuel and maintenance costs would be reduced by £10,000.
Assuming an interest/discount rate of 5%, compare the values of the company’s expenditures on its heating system over a ten year period for each of the following options:
(i) The company do not install a new heating system. (ii) The company install a new system but do not improve the insulation. (iii) The company install a new heating system and improve the insulation.
(i) Present Value (PV) £1 per year = (1 + i)n -1/ i(1 + i)n £50,000 x (1+0.05)10-1/0.05(1+0.05)10 = £50,000 x 7.7221 = £386,109
(ii) Maintenance costs is £20,000 a year Therefore, amount of £1 per year = (1+i)n-1/i = £20,000 x (1+0.05)10-1/0.05 =£20,000 x 12.5779 =£251,558
Here is a hint, Invest for Excel Software is designed for such calculations. You can download a free 30 days trial here: http://www.investforexcel.com/download. And here is a how-to-use Video.
Otherwise it is quite easy to do in plain Excel, all the formulas you need are built in. Just browse through Financial category functions, there are good descriptions.
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