Asked by GRETE ELISE WAGNER PAR on Jun 26, 2024
Verified
Norton Company is considering a closed-loop geothermal heat pump to replace its existing heating system. The project will require an initial investment of $750,000 and will return $200,000 each year for five years.
(a) If taxes are ignored and the required rate of return is 9%, what is the project's net present value?
(b) Based on this analysis, should Norton Company proceed with the project?Below is a table for the present value of $1 at compound interest. 
Below is a table for the present value of an annuity of $1 at compound interest. 
Geothermal Heat Pump
A central heating and/or cooling system that transfers heat to or from the ground, using the earth as a heat source or sink.
Net Present Value
A financial metric that estimates the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows over a period of time.
Compound Interest
Interest calculated on the initial principal and also on the accumulated interest from previous periods.
- Ascertain and evaluate the net present value (NPV) of investment suggestions.
- Evaluate investment plans by utilizing the internal rate of return (IRR) approach.
Verified Answer
BY
basant yadavJul 03, 2024
Final Answer :
(a)
($200,000 × 3.890) - $750,000 = $28,000
(b) Yes, since the net present value is greater than zero, Norton Company should proceed with the project.
(a)
($200,000 × 3.890) - $750,000 = $28,000
(b) Yes, since the net present value is greater than zero, Norton Company should proceed with the project.
Learning Objectives
- Ascertain and evaluate the net present value (NPV) of investment suggestions.
- Evaluate investment plans by utilizing the internal rate of return (IRR) approach.