Alexander Industries, in Chicago, plans to take advantage of the winds blowing in from Lake Michigan. Alexander is developing a project to install a wind turbine that would generate electricity and reduce energy costs. The turbine would have an initial cost of $500,000 and would provide a net cost savings of $57,000 per year. The turbine will have a life of 25 years. If Alexander assigns a discount rate of 10% to this project, what is the net present value (NPV)of the wind turbine?

Question

Quizplus · Accepted Answer

The correct answer is A. The net present value (NPV) of the wind turbine is $17,389. This is calculated by taking the present value of the net cost savings over the life of the turbine and subtracting the initial cost of the turbine. The present value of the net cost savings is calculated by multiplying the net cost savings by the present value factor for 10% over 25 years, which is 0.3855. The present value of the net cost savings is therefore $57,000 x 0.3855 = $21,868.50. The NPV is then calculated by subtracting the initial cost of the turbine from the present value of the net cost savings, which is $21,868.50 - $500,000 = $17,389.

Alexander Industries, in Chicago, Plans to Take Advantage of the Winds