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Comparison of capital budgeting techniques

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The department is considering the purchase of a new, more efficient pool heater for its swimming pool at a cost of $15000. It should save $3000 in cash operating costs per year. The estimated useful life is 8 years and zero disposal value. Ignore taxes.
1. What is the payback time?
2. Compute the NPV if the minimum rate of return desired is 8%. should department buy the heater? Why?
3. Using the ARR model, compute the rate of return on the initial investment.

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Your tutorial is 165 words plus three references and an analysis in Excel which is a template to use for future problems.

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1. What is the payback time?

Payback is the number of years it will take for the cash flows to recover the initial investments. See Excel attached for analysis.

2. Compute the NPV if the minimum rate of return desired is 8%. should department buy the heater? Why?

Yes, you should buy the heater. The returns, discount to the present at 8%, are greater than the initial cost. Said another way, the returns offer a return ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
  • PhD, Georgia State University
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