SuperPower Corp. employs coal to generate electricity. The firm purchases the right to generate electricity for...

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SuperPower Corp. employs coal to generate electricity. The firm purchases the right to generate electricity for the next three years in Texas. Each year, SuperPower can produce 1,000 kilowatts. The cost of coal is $100 per kilowatt, and the revenue per kilowatt is S150. The price of coal is hedged and fixed at $100 for the next three years. The expected market risk premium is 8%. The risk-free rate is 1.40%. The beta of coal is 0.65. The average beta of power companies in the S&P 500 is 0.72. a. What is the appropriate discount rate of this project? b. What is the NPV of this project? What should they do? c. Now suppose that SuperPower can use natural gas instead of coal at its convenience. The current price of Natural Gas is $110 to produce a kilowatt. With equal probability, the price of Natural Gas will rise 15% or fall 10% in each of the next two years. What is the value of the project? And what is the optimal strategy to use natural gas vs. coal? The beta of natural gas is 0.5. There are no costs for switching between coal and natural gas. d. There is a cost for switching from natural gas to coal and vice versa. This cost is fixed at $20,000. What is the value of the project? And what is the optimal strategy to use natural gas vs. coal? SuperPower Corp. employs coal to generate electricity. The firm purchases the right to generate electricity for the next three years in Texas. Each year, SuperPower can produce 1,000 kilowatts. The cost of coal is $100 per kilowatt, and the revenue per kilowatt is S150. The price of coal is hedged and fixed at $100 for the next three years. The expected market risk premium is 8%. The risk-free rate is 1.40%. The beta of coal is 0.65. The average beta of power companies in the S&P 500 is 0.72. a. What is the appropriate discount rate of this project? b. What is the NPV of this project? What should they do? c. Now suppose that SuperPower can use natural gas instead of coal at its convenience. The current price of Natural Gas is $110 to produce a kilowatt. With equal probability, the price of Natural Gas will rise 15% or fall 10% in each of the next two years. What is the value of the project? And what is the optimal strategy to use natural gas vs. coal? The beta of natural gas is 0.5. There are no costs for switching between coal and natural gas. d. There is a cost for switching from natural gas to coal and vice versa. This cost is fixed at $20,000. What is the value of the project? And what is the optimal strategy to use natural gas vs. coal?

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Cost of coal 100 per kilowatt Revenue 150 kilowatt Expected market risk p... View the full answer