life study period of the system. Also assume that the residual value of the system is negligible after 10

Copyright © 2025 Pearson Education, Inc.Solutions to Chapter 8 Problems

A Note To Instructors: Because of volatile energy prices in today's world, the instructor is encouraged to vary energy prices in affected problems (e.g. the price of a gallon of gasoline) plus and minus 50 percent and ask students to determine whether this range of prices changes the recommendation in the problem. This should make for stimulating in- class discussion of the results.

8-1. The basic question is this: “Is the extra $800 in investment cost justified by the annual energy savings of $100 per year for 10 years?” We assume that the real cost of energy does not inflate during the 10-year life (study period) of the system. Also assume that the residual value of the system is negligible after 10

years. The IRR of the difference between the two systems is:

• = -$800 + $100 (P/A, i’%, 10)

By trial and error (or Excel), we see that i’% = 4.3% > 2% so the more expensive system is cost justified. 1 / 4

Copyright © 2025 Pearson Education, Inc.8-2 Current Price = $5000 Yearly decrease = 8%

Price after 4 years = 5000 * (0.92)^4 = $3581.97

• / 4

Copyright © 2025 Pearson Education, Inc.8-3 The average rate of inflation is 10% per year, and the market place interest rate is

5% + 10% + (5%)(10%) = 15.5% per year.

PW 2 = ($1,000)



10.0155.0

)23%,10,/)(23%,5.15,/(1



PFFP

= $12,262.36

PW 0 = $12,262.36 (P/F, 15.5%, 2) = $9,192.

• / 4

Copyright © 2025 Pearson Education, Inc.8-4 Current = $100,000 Rate = 2%

The value after 5 years = 10000 * (1.02)^5 = $110,408

• / 4