You can insulate your home for $7,200. You figure you can save 15% per year on your heating bill if you insulate. Your home was bought 15 years ago for $38,500. You figure real estate prices have gone up 16% each year. You plan to live in the house another 10 years. Your home has five bedrooms, 2367 square feet and requires 5400 BTU's per hour to heat. You heat with oil and use 175 barrels of oil per year. Oil currently costs $25 per barrel. Money is worth 5% to you. Should you insulate your home. Why?

It falls under Time Value of Money topic...

To determine whether it is worth insulating your home, we need to consider the potential savings from insulation and compare it to the investment cost. Here are the steps to calculate the potential savings:

1. Calculate the current annual heating cost:
To calculate the current annual heating cost, we need to find out the total number of heating hours per year and the cost of heating oil.

- Heating hours per year: Multiply the number of days in a year (365) by the number of hours you use heating per day. In this case, if you use heating all day, multiply 365 by 24. If you only use heating during certain hours, multiply 365 by the number of hours you heat per day.
- Total annual oil consumption: Multiply the number of barrels of oil used per year (175) by the cost of each barrel ($25).
- Current annual heating cost: Multiply the total annual oil consumption by the cost per barrel.

2. Calculate the potential annual savings with insulation:
To determine the potential annual savings with insulation, we need to know the current heating cost and the expected reduction in heating cost after insulation.

- Expected annual heating savings: Multiply the current annual heating cost by the percentage of savings from insulation (15% in this case).

3. Calculate the present value of the potential savings:
To compare the investment cost of insulation to the future savings, we need to calculate the present value of the potential savings. This accounts for the time value of money, assuming a 5% interest rate.

- Present value of potential savings: Discount the potential annual savings over the remaining 10 years of living in the house to its present value using the 5% interest rate.

4. Calculate the return on investment (ROI):
To determine if insulating the home is worth it, we compare the present value of the potential savings to the cost of insulation.

- Return on investment: Calculate the ROI by dividing the present value of potential savings by the cost of insulation. If the ROI is greater than 1, it indicates the potential returns are higher than the investment cost, making it worth insulating.

By following these steps and plugging in the given values, you can calculate whether it is financially beneficial to insulate your home.