Tom and Tanya both live in upstate NY and are considering whether to add insulation to their respective homes.A local company has offered each of them a separate contract to add insulation for $3,000 (a one-time cost for each person) which will reduce the total heating requirements by 10% for each.Both Tom and Tanya will pay for this using a home equity loan at 8% per year over 15 years.
Tom and Tanya have identical homes on the same street. The only difference between them is that Tom heats his home with electricity whereas Tanya heats her’s with natural gas.
Your task is help Tom and Tanya decide if they should add the extra insulation to each of their homes.The information available to you is summarized in the table below.
Tom: electric heat
Tanya: natural gas heat
Heating degree days
5,000
5,000
Size of home
2,500 square feet
2,500 square feet
Home heating before insulation
200 MBtu/year
200 MBtu/year
One-time insulation cost
$3,000
$3,000
Home equity loan interest rate
8%
8%
Loan period
15 years
15 years
Energy reduced in home by insulation (10% of 200)
20 MBtu/year
20 MBtu/year
Furnace efficiency
95%
80%
Purchase price of energy
9 cents/kWh
6.8 $/1000 cubic foot
Heat content of energy source
3,412 Btu/kWh
1,027 Btu/cubic foot
What should Tom and Tanya do? Should both Tom and Tanya add the insulation? Neither? Or should one of them add the insulation but not the other? Show how you arrive at your recommendation.
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