Question

The heat loss through the walls of a brick factory is estimated to cost $3,000 next year. A salesperson from PGF Insulation Sdn Bhd told you, as the factory engineer, that the insertion of $18,000 worth of fiberglass into the wall structure could help to reduce the heat loss by 80%. If the cost of heat loss increases by $200 per year (uniform gradient) after the next year and the owner of the factory plans to keep the factory for 15 more years, what would you recommend if the interest rate is 10% per year? (Hint: Calculate the present equivalent value of the savings)

Answer 1

Cost saving next year=3000*80%=$2400

Uniform gradient of saving per year=200*80%=$160

Rate of interest=i=10%

Time period=n=15

Present equivalent value of savings=2400*(P/A,0.10,15)+160*(P/G,0.10,15)

Let us calculate the interest factors

So,

Present equivalent value of savings=2400*7.606080+160*40.151988=$24678.91

Since present value of savings due to fiberglass is higher than its cost ($18000). I would recommned the use of fiberglass.