Present Worth of a Space-Heating System A retrofitted space-heating system is being considered for a small office building. The system can be purchased and installed for $110,000, and it will save an estimated 300,000 kilowatt-hours (kWh) of electric power each year over a six-year period. A

Question

Present Worth of a Space-Heating System
A retrofitted space-heating system is being considered for a small office building. The system can be purchased and installed for $110,000, and it will save an estimated 300,000 kilowatt-hours (kWh) of electric power each year over a six-year period. A kilowatt-hour of electricity costs $0.10, and the company uses a MARR of 15% per year in its economic evaluations of refurbished systems. The market value of the system will be $8,000 at the end of six years, and additional annual operating and maintenance expenses are negligible. Use the PW method to determine whether this system should be installed.

Accepted Answer

To find the PW of the proposed heating system, we need to find the present equivalent of all associated cash flows. The estimated annual savings in electrical power is worth 300,000 kWh×$0.10/kWh = $30,000 per year. At a MARR of 15%, we get

PW(15%) = −$110,000+$30,000 (P/A, 15%, 6) + $8,000 (P/F, 15%, 6)
= −$110,000 + $30,000(3.7845) + $8,000(0.4323)
= $6,993.40.
Since PW(15%)≥0, we conclude that the retrofitted space-heating system should be installed.

Question 5.2: Present Worth of a Space-Heating System A retrofitted space-...

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