Question

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900. After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. The homeowner's water bill is thus lowered by a fixed amount every year, forever. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.) A. $145 B. $160 C. $175 D. $190

Answer 1

correct option is A. $145

Step-by-step explanation:

given data

investment cost = $2900

interest rate = 5% per year

solution

formula for present value of perpetuity is

investment cost = fixed cash saving per year ÷ interest rate ..................1

put her value we get fixed cash saving per year that is

saving per year cost = $2900 × 5%

saving per year cost = $2900 × 0.05

saving per year cost = $145

so correct option is A. $145