Saturday, June 27, 2009

incremental investment value with financing

In thinking about investment value, one important aspect is how the investment is financed. for example, suppose a homeowner is considering a new air-conditioning and heating system to reduce utility costs. Perhaps the replacement system costs $2,000 and the homeowner will finance 75 percent of the cost with a home equity mortgage loan. then it is important to account for the effect of the loan on the investment outcome. the first effect is that the investment cost now is $500 instead of $2,000. But offsetting this advantage,is that the savings in utility costs now go partially to repay the loan, thus reducing the future net benefits for the first few years, and therefore reducing the incremental value. Usually such a loan will enhance the attractiveness of the investment, but it must be evaluated on case-by-case basic.

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