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The Facts: Your companys heating, ventilating, and A/C (HVAC) systems still work but are outofdate....

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Accounting

The Facts:

Your companys heating, ventilating, and A/C (HVAC) systems still work but are outofdate. A new system will cost $150,000, will last 20 years, and will be more energyefficient It will save $22,500 in cash expenses each year It will provide taxdeductible depreciation expense each year (numbers for each year are provided) Your expected tax rate is 25% Your hurdle rate for this project is 10%

The question:

1a). The NPV analysis shows the expected return exceeds the hurdle rate. Are there important assumptions that make this analysis tenuous? If so, what specific assumptions?

1b). What factors go into determining the projects hurdle rate? Do you think this projects hurdle rate should be higher or lower than the companys cost of capital? Why?

1c). The Payback method analysis says it will take 8 years to recover the initial investment. Is there a flaw in this analysis?

1d). Would you invest in something that took 8 years to pay back?

1e). Another investment, to develop a new product, also has an expected IRR of 11%. Which project would you choose? Why?

1f). Would you choose to invest in this new HVAC system? Why or why not?

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