Number 2

PROBLEM SET NO. 2 ES 321 2. The heat loss through the exterior walls of a certain poultry processing plant is estimated to cost the owner $3,000 next year. A salesman from Superfiber insulation, has told you, the plant manager, that he can reduce the heat loss by 80% with the installation of $15,000 worth of Superfiber now. If the cost of heat loss rises by $200 per year (gradient) after the next year and the owner plans to keep the building for 15 more years, what would you recommend if the interest rate is 12% per year? A = 3 ,000

G = 200 i = 12%

n = 15

 1  G  ( 1 + i )n − 1 − n   n i  i  ( 1 + i )    200 ( 1 + 0.12 )15 − 1 1 PG = − 15    15  0.12  0.12  ( 1 + 0.12 ) 

PG =

PG = $6 ,784 .03

Ciruela, Reynante T. PROBLEM SET NO. 2 1

ES 321 ….Continuation No. 2

1 − ( 1 + i )−n  PA = A  i   1 −( 1 + 0.12 )−15  PA = 3 ,000   0.12  

PA = $20 ,432 .59 P = PG + PA P = $6 ,784 .03 + $20 ,432 .59 P = $27 ,216 .62 (Total heat loss cost without insulation) ( 1 −0.80 )($ 27 ,216 .62 ) = $5 ,443 .32 (Heat loss cost with insulation) Insulation cost = $15 ,000

Present worth total cost for heat loss with installed Superfiber = $15 ,000 + $5 ,443 .32 = $20 ,443 .32

Installing superfiber insulation is recommended. Profit when installing Superfiber = $27 ,216 .62 −$20 ,443 .32 = $6 ,773 .30

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