Reference no: EM132494945

Question - You bought a house two years ago and the hot water heater just died. You are considering replacing it with an updated version of the same model, which would cost you $400 including installation. Your family consumes about 220 gal of hot water daily, which costs you $460 in utilities each year. The new tank comes with a 20-year guarantee, and at the end of that time, you assume it would be discarded and a new version installed, so zero salvage cost.

Alternatively, you have been researching solar powered hot water systems and found a system that would meet your family's requirements. It includes two solar panels and a storage tank with an auxiliary heating coil for those cloudy days. Total cost for this new system is $2800 including installation. To power the backup system is estimated to cost $110/year in utilities, and every fourth year, starting in year 4, $380 of maintenance will be required. At the 20-year point, you assume technology would have improved so this system would have zero value, and a new system would be installed.

Assuming a 7% discount rate, which system would be more economical over the 20-year life? When would the two systems be equal in cost?