Direct Energy has two options for upgrading a natural gas power station to meet new government standards. Option 1: Direct Energy will make the upgrades themselves. This is expected to cost $12,100 at the end of every three months for 13 years. At the end of the operation (in 13 years) Direct Energy expects to sell all equipment needed for the upgrade for $95,000. Option 2: Pay experienced contractors. This will cost $37,000 up front and $12,200 quarterly for 13 years. Assume all interest is 2.11% compounded quarterly. Round the answers to NPV (Option 1), and NPV (Option 2) to the nearest dollar. Round all other answers to two decimal places where applicable. 1) Find the net present value of option 1: Payments (Cost) Sale of equipment (Residual) P/Y = 4 4 C/Y = 4 4 N = 52 52 I/Y = 2.11% 2.11% PV = $549025.31 $72262 PMT = $12100 $0 FV = $0 $95000 (If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.) NPV (Option 1) = $ (rounded to the nearest whole number) 2) Find the net present value of option 2: Payments (Cost) P/Y 4 C/Y 4 N 52 I/Y 2.11% PV $553563 PMT $12200 FV $0 (If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.) NPV (Option 2) = $ (round to the nearest whole number) 3) Which option should Direct Energy choose? Option 1 SOLVE FOR NPV (OPTION 1) AND NPV (OPTION 2)
Direct Energy has two options for upgrading a natural gas power station to meet new government standards.
Option 1: Direct Energy will make the upgrades themselves. This is expected to cost $12,100 at the end of every three months for 13 years. At the end of the operation (in 13 years) Direct Energy expects to sell all equipment needed for the upgrade for $95,000.
Option 2: Pay experienced contractors. This will cost $37,000 up front and $12,200 quarterly for 13 years.
Assume all interest is 2.11% compounded quarterly.
Round the answers to NPV (Option 1), and NPV (Option 2) to the nearest dollar. Round all other answers to two decimal places where applicable.
1) Find the
| Payments (Cost) | Sale of equipment (Residual) | |
| P/Y = | 4 | 4 |
| C/Y = | 4 | 4 |
| N = | 52 | 52 |
| I/Y = | 2.11% | 2.11% |
| PV = | $549025.31 | $72262 |
| PMT = | $12100 | $0 |
| FV = | $0 | $95000 |
(If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.)
NPV (Option 1) = $ (rounded to the nearest whole number)
2) Find the net present value of option 2:
| Payments (Cost) | ||
| P/Y | 4 | |
| C/Y | 4 | |
| N | 52 | |
| I/Y | 2.11% | |
| PV | $553563 | |
| PMT | $12200 | |
| FV | $0 |
(If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.)
NPV (Option 2) = $ (round to the nearest whole number)
3) Which option should Direct Energy choose?
- Option 1
SOLVE FOR NPV (OPTION 1) AND NPV (OPTION 2)
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