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
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
| 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
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