Direct Energy has two options for upgrading a natural gas power station to meet new government standards.
Question:
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 $12,000 at the end of every three months for 14 years. At the end of the operation (in 14 years) Direct Energy expects to sell all equipment needed for the upgrade for $105,000.
Option 2: Pay experienced contractors. This will cost $39,000 up front and $14,200 quarterly for 10 years.
Assume all interest is 2.33% 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 = | ||
C/Y = | ||
N = | ||
I/Y = | % | % |
PV = | $ | $ |
PMT = | $ | $ |
FV = | $ | $ |
(If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.)
NPV (Option 1) = $
2) Find the net present value of option 2:
Payments (Cost) | ||
P/Y | ||
C/Y | ||
N | ||
I/Y | % | |
PV | $ | |
PMT | $ | |
FV | $ |
(If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.)
NPV (Option 2) = $
3) Which option should Direct Energy choose?
- Option 1
- Option 2
- Either option could be chosen
Exploring Engineering An Introduction to Engineering and Design
ISBN: 978-0123747235
2nd edition
Authors: Philip Kosky, George Wise, Robert Balmer, William Keat