A firm that purchases electric power from the local utility is considering the alternative of generating its own electricity. The current cost of obtaining the firm's electricity from its local utility is $42,000 per year. The cost of a steam generator (installed) is $140,000, and annual maintenance and fuel expenses are estimated at $22,000. The generator is expected to last for 10 years, at which time it will be worthless. The cost of capital is 10%, and the firm pays no taxes.
Required:
Should the firm install the electric generator? Why or why not?
The engineers have calculated that with an additional investment of $40,000, the excess steam from the generator can be used to heat the firm's buildings. The current cost of heating the buildings with purchased steam is $21,000 per year. If the generator is to be used for heat as well as electricity, additional fuel and maintenance costs of $10,000 per year will be incurred. Should the firm invest in the generator and the heating system? Show all calculations.