You are considering three methods for producing electricity in your company\'s m

Question

You are considering three methods for producing electricity in your company's manufacturing plant. An oil generator costs $350,000 and it has a useful life of five years. The costs of operating the oil generator require after-tax cash flows of $150,000 per year. A natural gas generator costs $250,000 and it has a useful life of eight years. The costs of operating the natural gas generator require after-tax cash flows of $250,000 per year. A biomass generator costs $450,000 and it has a useful life of six years. The costs of operating the biomass generator require after-tax cash flows of $100,000 per year.

a. If your company's weighted average cost of capital is 9% per year, by which method should you generate electricity? ( Oil, Natural gas, or Biomass)

b. What is the annualized cost of producing electricity by the preferred method (EAA)?

Explanation / Answer

Using the above analysis we can see that NPV of Biomass generator is minimum and one should select Biomass generator for generate electricity.

Ans b) Annulazied cost of producing electricity

898,591.86 = annulaized cost * (1 - (1+r)^-n)/r

898,591.86 = annulaized cost * (1 - (1.09)^-6)/.09

annualized cost = $200313.90

Year 0 1 2 3 4 5 6 7 8 cashflow(oil genrator) $    350,000.00 $      150,000.00 $                            150,000.00 $       150,000.00 $ 150,000.00 $ 150,000.00 present value $    350,000.00 $      137,614.68 $                            126,252.00 $       115,827.52 $ 106,263.78 $   97,489.71 NPV $    933,447.69 cashflow(natural gas generator) $    250,000.00 $      250,000.00 $                            250,000.00 $       250,000.00 $ 250,000.00 $ 250,000.00 $ 250,000.00 $ 250,000.00 $ 250,000.00 present value $    250,000.00 $      229,357.80 $                            210,420.00 $       193,045.87 $ 177,106.30 $ 162,482.85 $ 149,066.83 $ 136,758.56 $ 125,466.57 NPV $ 1,633,704.78 cashflow(biomass generator) $    450,000.00 $      100,000.00 $                            100,000.00 $       100,000.00 $ 100,000.00 $ 100,000.00 $ 100,000.00 present value $    450,000.00 $        91,743.12 $                              84,168.00 $         77,218.35 $   70,842.52 $   64,993.14 $   59,626.73 NPV $    898,591.86

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.