Peter J Wilcoxen > PAI 789 Advanced Policy Analysis

Transformer Upgrade (p05)

An electric utility is considering replacing a large transformer. The new unit would cost $1 million. It would be installed in year 0 and would operate for the next 25 years (years 1-25). It would be more efficient than the existing transformer and would save the utility $150,000 a year in maintenance and electrical costs.

  1. Please draw an appropriate cash flow diagram and calculate the net present value of replacing the transformer. The firm uses a 10% interest rate in present value calculations.
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 05/26/2023