Question
Asked Feb 6, 2020
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f you insulate your office for $29,000, you will save $2,900 a year in heating expenses. These savings will last forever.

 

a. What is the NPV of the investment when the cost of capital is 5%? 10%?

b. What is the IRR of the investment? (Enter your answer as a whole percent.)

c. What is the payback period on this investment?

 

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Expert Answer

Step 1

a.

Given,

Saving Amount per Year = $2,900

Investment Amount = $29,000

 

NPV at Cost of Capital of 5%:

The calculation of the NPV of the investment at the cost of capital at 5% is as follows:

 

Finance homework question answer, step 1, image 1

Hence, NPV is $29,000 when the cost of capital is 5%.

 

NPV at Cost of Capital of 10%:

The calculation of the NPV of the investment at the cost of capital at 10% is as follows:

 

Finance homework question answer, step 1, image 2

Hence, NPV is $0 when the cost of capital is 10%.

Step 2

The rate at which the NPV is zero is termed as IRR and in this investment, the NPV is ze...

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