Question

Your company is environmentally conscious and is looking at two heating options for a new research building. What you know about each option is below, and your company will use an annual interest rate of 8% for this decision: Gas Heating Option: The initial equipment and installment of the natural gas system would cost $225,000 right now. The maintenance costs of the equipment are expected to be $2,000 per year, starting next year, for each of the next 20 years. The energy cost is expected to be $5,000, starting next year, and is expected to rise by 5% per year for each of the next 20 years due to the price of natural gas increasing. Geothermal Heating Option: Because of green energy incentives provided by the government, the geothermal equipment and installation is expected to cost only $200,000 right now, which is cheaper than the gas lines. There would be no energy cost with geothermal, but because this is a relatively newer technology, the maintenance costs are expected to be $15,000 per year, starting next year, for each of the next 20 years. Which is the lower cost option for the company?

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Answer 1