A firm that purchases electricity from the local utility for $300,000 per year is considering installing...

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A firm that purchases electricity from the local utility for$300,000 per year is considering installing a steam generator at acost of $260,000. The cost of operating this generator would be$210,000 per year, and the generator will last for five years. Ifthe firm buys the generator, it does not need to purchase anyelectricity from the local utility. The cost of capital is 11%.
For the local utility option, consider five years of electricitypurchases. For the generator option, assume immediate installation,with purchase and operating costs in the current year and operatingcosts continuing for the next four years. Assume payments underboth options at the start of each year (i.e., immediate, one yearfrom now,..., four years from now).
What is the net present value of the more attractive choice?

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Solution The NPV of the option to purchase electricity from thelocal utility 123073371 1230734 when rounded off See Answer

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A firm that purchases electricity from the local utility for$300,000 per year is considering installing a steam generator at acost of $260,000. The cost of operating this generator would be$210,000 per year, and the generator will last for five years. Ifthe firm buys the generator, it does not need to purchase anyelectricity from the local utility. The cost of capital is 11%.For the local utility option, consider five years of electricitypurchases. For the generator option, assume immediate installation,with purchase and operating costs in the current year and operatingcosts continuing for the next four years. Assume payments underboth options at the start of each year (i.e., immediate, one yearfrom now,..., four years from now).What is the net present value of the more attractive choice?