If you insulate your office for $20,000, you will save $2,000 a year in heating expenses. These savings will last forever.

If you insulate your office for $20,000, you will save $2,000 a year in heating expenses. These savings will last forever.



a. What is the NPV of the investment when the cost of capital is 8%? 10%?


b. What is the IRR of the investment?


c. What is the payback period on this investment?


Explanation
Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations.

a.
The present value of the savings is $2,000 / r.
r = .08 ⇒ PV = $25,000 and NPV = −$20,000 + $25,000 = $5,000
r = .10 ⇒ PV = $20,000 and NPV = −$20,000 + $20,000 = $0
b.
IRR = .10, or 10%

At this discount rate, NPV = $0
c.
Payback period = Initial investment / Annual cash flow = $20,000 / $2,000 = 10 years
Thank you!