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 percent and the firm pays

no taxes.

a) Should the firm install the electric generator? Why or why not?

b) 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.