If you buy a new highefficiency furnace for your home you wi

If you buy a new high-efficiency furnace for your home, you will see the following costs an benefits, at an estimated interest rate of 3%. What is the payback period, in years? Purchase cost Annual savings Life $2000 180 15 years 5 years ago, a man put $2000 in a 1.0% APY savings account at his local bank. Ass 2% inflation, . What is his current balance? . What is his current purchasing power, in original (5-years-ago) dollars?

Solution

(Question 1)

Since the question asks for Payback Period (PBP) and not Discounted Payback Period, we do a non-discounted cash flow analysis.

PBP is the time by when a projects cumulative cash flow equals zero.

PBP lies between years 11 and 12.

PBP = 11 + (Absolute value of cumulative cash flow in year 11 / Cash flow in year 12)

= 11 + (20/180) = 11 + 0.11

= 11.11 years

NOTE: As per Chegg Answering Policy, 1st question is answered.

Year	Cash Flow ($)	Cumulative Cash Flow ($)
0	-2,000	-2,000
1	180	-1,820
2	180	-1,640
3	180	-1,460
4	180	-1,280
5	180	-1,100
6	180	-920
7	180	-740
8	180	-560
9	180	-380
10	180	-200
11	180	-20
12	180	160
13	180	340
14	180	520
15	180	700