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.