1.Net Present Value (NPV) examines financial performance in absolute terms.How does this differ from Benefit/Cost Ratios and...
Question:
1.Net Present Value (NPV) examines financial performance in absolute terms.How does this differ from Benefit/Cost Ratios and Internal Rate of Return (IRR)?
2.Net Present Value requires the computation of a discount rate.Discuss the challenges this presents to an organization.
3.What is the fundamental premise of Benefit/Cost Analysis?What is the value of this analysis?What are some of the risks?
CASE STUDY: Building a Wind powered electrical generating plant
Background
Integration of wind generation into a wholesale power supply portfolio requires a proper balance between the operating characteristics of base load generation, power purchase agreement flexibility and cost of service objectives. Purchasing or generating wind power has an associated expense that must be addressed as the wholesale power supplier meets its obligation to supply a reliable, affordable and balanced supply of wholesale electric energy and related services to its member systems. The integration of wind generation into a power supply portfolio can be challenging and the "all in" costs associated with this resource must be objectively considered in order to accurately reflect the contribution this resource will make to supply portfolio pricing.
Results of a Feasibility Study
A feasibility study was carried out to see what the costs and consequences would be of building the Wind powered electrical generating plant. Basic data on anticipated costs and benefits are provided in Table A and B respectively.
Table A
Year ->
1
2
3
4
5
6
7
8
9
10
Initial capital costs
300
600
500
Cost of operations
40
42
50
46
52
61
59
Anticipated maintenance
25
42
35
41
27
29
31
Other costs
80
80
65
40
44
24
15
16
19
18
TOTAL
380
680
565
105
128
109
102
95
109
108
Table B
Year ->
1
2
3
4
5
6
7
8
9
10
Income to Cooperative
45
101
122
135
136
175
201
220
Secondary income generation effects
85
119
122
163
201
305
412
415
453
487
TOTAL
85
119
167
264
323
440
548
590
654
707
1.What is the undiscounted Benefit/Cost of the project?
2.If this project could be financed at a rate of 10%, could it be economically justified?Why?
3.What is the Net Present Value of this project using a discount rate of 10%?
4.In what year does this project break even?Is this timeframe acceptable?Why?
Expert Answer:
1 The undiscounted BenefitCost of the project can be calculated by summing up the total benefits and dividing it by the total costs From Table B the t... View the full answer
