A firm that purchases electricity from the local utility for $200,000 per year is considering installing a steam generator at a cost of $290,000. The cost of operating this generator would be $150,000 per year, and the generator will last for five years. If the firm buys the generator, it does not need to purchase any electricity from the local utility. The cost of capital is 9%. For the local utility option, consider five years of electricity purchases. For the generator option, assume immediate installation, with purchase and operating costs in the current year and operating costs continuing for the next four years. Assume payments under both options at the start of each year (i.e., immediate, one year from now,..., four years from now). What is the net present value of the more attractive choice? Please round your answer to the nearest dollar. Report the NPV of cost as a negative number.
A firm that purchases electricity from the local utility for $200,000 per year is considering installing a steam generator at a cost of $290,000. The cost of operating this generator would be $150,000 per year, and the generator will last for five years. If the firm buys the generator, it does not need to purchase any electricity from the local utility. The cost of capital is 9%. For the local utility option, consider five years of electricity purchases. For the generator option, assume immediate installation, with purchase and operating costs in the current year and operating costs continuing for the next four years. Assume payments under both options at the start of each year (i.e., immediate, one year from now,..., four years from now). What is the net present value of the more attractive choice? Please round your answer to the nearest dollar. Report the NPV of cost as a negative number.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A firm that purchases electricity from the local utility for $200,000 per year is considering installing a steam
generator at a cost of $290,000. The cost of operating this generator would be $150,000 per year, and the
generator will last for five years. If the firm buys the generator, it does not need to purchase any electricity from the
local utility. The cost of capital is 9%.
For the local utility option, consider five years of electricity purchases. For the generator option, assume immediate
installation, with purchase and operating costs in the current year and operating costs continuing for the next four
years. Assume payments under both options at the start of each year (i.e., immediate, one year from now,..., four
years from now).
What is the net present value of the more attractive choice?
Please round your answer to the nearest dollar. Report the NPV of cost as a negative number.
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