The more attractive choice is the choice that has less present value which is Using steam generator valued at $1, 364,165.02
<u>Given data;</u>
cost of electricity per year: = $350,000
cost of installing a steam generator = $280,000
generator operation cost per year = $260,000
generator will last for = 5 years
cost of capital for local utility option = 10%
purchasing electricity from the local utility
cost of electricity per year: = $350,000
cost of capital for local utility option = 10%
Present value = - 350,000 - 350,000 / 1.10 - 350,000 / 1.10^2 - 350,000 / 1.10^3 - 350,000 / 1.10^4
Present value = - 1,453,452.906
Present value = - 1,453,452.91
Using steam generator
cost of installing a steam generator = $280,000
generator operation cost per year = $260,000
Present value = - 280,000 - 260,000 - 260,000 / 1.10 - 260,000 / 1.10^2 - 260,000 / 1.10^3 - 260,000 / 1.10^4
Present value = - 1, 364,165.016
Present value = - $1, 364,165.02
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