Homework Help is Here – Start Your Trial Now!
Business
Accounting
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.

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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 17P
See similar textbooks
icon
Related questions
Question
Direct Energy has two options for upgrading a hydro-electric power station to meet new government standards. Option 1: Direct Energy will make the upgrades themselves. This is expected to cost $11,600 at the end of each month for 15 years. At the end of the operation (in 15 years) Direct Energy expects to sell all equipment needed for the upgrade for $102,000. Option 2: Pay experienced contractors. This will cost $25,000 up front and $11,700 monthly (at the end of every month) for 13 years. Assume all interest is 3.19% compounded monthly. 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: P/Y = C/Y = N = I/Y = PV = PMT= FV = NPV (Option 1) = $ P/Y C/Y N I/Y PV Payments (Cost) 2) Find the net present value of option 2: Payments (Cost) PMT $ FV $ (If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.) $ $ % $ $ Sale of equipment (Residual) $ % $ $ % (rounded to the nearest whole number)
Transcribed Image Text:Direct Energy has two options for upgrading a hydro-electric power station to meet new government standards. Option 1: Direct Energy will make the upgrades themselves. This is expected to cost $11,600 at the end of each month for 15 years. At the end of the operation (in 15 years) Direct Energy expects to sell all equipment needed for the upgrade for $102,000. Option 2: Pay experienced contractors. This will cost $25,000 up front and $11,700 monthly (at the end of every month) for 13 years. Assume all interest is 3.19% compounded monthly. 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: P/Y = C/Y = N = I/Y = PV = PMT= FV = NPV (Option 1) = $ P/Y C/Y N I/Y PV Payments (Cost) 2) Find the net present value of option 2: Payments (Cost) PMT $ FV $ (If the NPV is negative, enter it as a negative number. If the NPV is zero, enter 0.) $ $ % $ $ Sale of equipment (Residual) $ % $ $ % (rounded to the nearest whole number)
(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 Option 2 Either option could be chosen
Transcribed Image Text:(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 Option 2 Either option could be chosen
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Techniques of Time Value Of Money
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Excel Applications for Accounting Principles
Excel Applications for Accounting Principles
Accounting
ISBN:
9781111581565
Author:
Gaylord N. Smith
Publisher:
Cengage Learning
Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
SEE MORE TEXTBOOKS