Aretail outlet is being designed in a strip mall in nebraska. for this outlet, the installed fiberglass insulation to protect against heat loss in the winter and heat gain in the summer will cost an estimated $90,000. the annual savings in energy due to the insulation will be $16,000 at eoy one in the 7-year life of the outlet, and these savings will increase by 15% each year thereafter. if the annual interest rate is 18%, is the cost of the proposed amount of insulation justified?

what is the present equivalent of energy savings?

The present equivalent of energy savings is $88,000 and since the amount is less than the cost of insulation, the cost of insulation is not justified.

Explanation:

the cost of installation is $90,000. the life of insulation is 7 years.

the interest rate, r is 0.18.

the cash flow series of energy savings is a geometric cash flow series. where the first cash flow , A is $16,000  and the geometric gradient is 0.15

The present equivalent of energy savings is given by:

P = A[(1+(1+g)^n(1+i)^-n)/(i-g)]

   = (16000)[(1+(1+0.15)^7(1+0.18)^-7)/(0.18-0.15)]

   = $88,000

Therefore, The present equivalent of energy savings is $88,000 and since the amount is less than the cost of insulation, the cost of insulation is not justified.

answer; whoever is willing and able to pay the price;

answer; buyer guide;