Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Your company is environmentally conscious and is considering two heating
options for a new buildings. What you know about each option is below, and your company
will use an annual interest rate (MARR) of 7% for this decision.
1. Gas heating option: the initial equipment and installment of the natural gas system
would cost OMR 83,000 right now. The maintenance costs of the equipment are
expected to be OMR 730 per year, starting next year, for each of the next 20 years.
The energy cost is expected to be OMR 1840 starting next year and is expected to raise
by 7% per year for each of the next 20 years due to the price of the natural gas.
2. Geothermal heating option: because of green energy incentives provided by the
government, the geothermal equipment and installation are expected to cost only
OMR 72,000 right now, which is cheaper than the gas lines. There would be no energy
cost with geothermal, but because this is relatively newer technology the
maintenance is expected to be OMR 3680 per year, starting next year, for each of the
next 20 years.
Which is the lower cost option for the company? Use the present worth method.
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