Question

You must decide which of two wind turbines to purchase for a new wind farm your company is planning to build. Turbine A will initially cost $1,300,000 to install and and is estimated to generate $32,000 per year of revenue. Turbine B will cost $1,900,000 initially but will generate $48,000 per year of revenue. Assuming a 2.5% annual interest rate and that both machines will last 20 years, which machine should be purchased? (Hint: Consider the future worth of these investments.)

Answer 1

Answer:

Machine A:  Net present value    (801.147)

Machine B:  Net present value   (1,151,720)

As machine A has a better net present value that is the machine it should be purchased.

Explanation:

We will calcualte the net present value of the revenues per year using the ordinary annuity.

Then, we subtract the turbine cost and get the net present value

the better numebr ill be the turbine to purchase

Machine A present worth:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C $32,000

time:     20 years

rate 2.5% = 0.025

$32,000 \times \frac{1-(1+0.025)^{-20} }{0.025} = PV$

PV $498,853.1931

498,853 - 1,300,000 = 801.147

C $48,000

$48,000 \times \frac{1-(1+0.025)^{-20} }{0.025} = PV$

PV $748,279.7897

1,900,000 - 748,280 = 1,151,720