A major utility company, PowerGrid, is considering investing in renewable energy power plants to diversify its...
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A major utility company, PowerGrid, is considering investing in renewable energy power plants to diversify its energy portfolio and meet the increasing demand for clean energy. However, they are unsure if the demand trend for renewable energy is a temporary spike or a real long-term trend. They believe that there is a 60% chance that the demand is real and a 40% chance that it is a temporary spike. Below are some numbers related to the new power plant project: The upfront cost of the new renewable energy power plant is $(70+ BBB/100) million. The new power plant is expected to have a life of 20 years. If the trend is real, then the annual net profit from this power plant will be $12M/year during the project life. If it is a temporary spike, it will be $6M/year. (Note that this number does not include the upfront cost that was mentioned earlier). PowerGrid's MARR is AAA%. a. Calculate the expected PW of the project. Suppose that there is a chance that the government introduces new incentives and subsidies for renewable energy power plants. This will increase the annual profit by 50% (that is $18M and $9M for real and temporary spike cases respectively). PowerGrid estimates that the chance of new incentives and subsidies is 25% if the trend is real and only 10% if it is a temporary spike. This might help not to forget the other part of calculation: PowerGrid estimates that the chance of new incentives and subsidies is 25% if the trend is real and only 10% if it is a temporary spike (the probability of demand being real or a temporary spike still follows the 60% and 40%, as mentioned earlier). b. Calculate the expected PW of the project when incorporating the possibility of new government incentives and subsidies. Alternatively, PowerGrid can invest in market research to get a better understanding of whether the demand trends are real. The market research will cost the company $4M, and PowerGrid is confident that this will completely resolve the uncertainty about whether the trend is real or a temporary spike. Once the market research is done, PowerGrid has the option to invest in the new power plant. c. Draw a decision tree for this problem. Make sure you use the proper symbols for the decision nodes, chance nodes, and outcome nodes, and clearly label each branch of the tree. You can draw the tree by hand and include a clear picture of it or use any drawing software (PowerPoint, etc.). d. Solve the tree step-by-step and determine the expected PW of the project. A major utility company, PowerGrid, is considering investing in renewable energy power plants to diversify its energy portfolio and meet the increasing demand for clean energy. However, they are unsure if the demand trend for renewable energy is a temporary spike or a real long-term trend. They believe that there is a 60% chance that the demand is real and a 40% chance that it is a temporary spike. Below are some numbers related to the new power plant project: The upfront cost of the new renewable energy power plant is $(70+ BBB/100) million. The new power plant is expected to have a life of 20 years. If the trend is real, then the annual net profit from this power plant will be $12M/year during the project life. If it is a temporary spike, it will be $6M/year. (Note that this number does not include the upfront cost that was mentioned earlier). PowerGrid's MARR is AAA%. a. Calculate the expected PW of the project. Suppose that there is a chance that the government introduces new incentives and subsidies for renewable energy power plants. This will increase the annual profit by 50% (that is $18M and $9M for real and temporary spike cases respectively). PowerGrid estimates that the chance of new incentives and subsidies is 25% if the trend is real and only 10% if it is a temporary spike. This might help not to forget the other part of calculation: PowerGrid estimates that the chance of new incentives and subsidies is 25% if the trend is real and only 10% if it is a temporary spike (the probability of demand being real or a temporary spike still follows the 60% and 40%, as mentioned earlier). b. Calculate the expected PW of the project when incorporating the possibility of new government incentives and subsidies. Alternatively, PowerGrid can invest in market research to get a better understanding of whether the demand trends are real. The market research will cost the company $4M, and PowerGrid is confident that this will completely resolve the uncertainty about whether the trend is real or a temporary spike. Once the market research is done, PowerGrid has the option to invest in the new power plant. c. Draw a decision tree for this problem. Make sure you use the proper symbols for the decision nodes, chance nodes, and outcome nodes, and clearly label each branch of the tree. You can draw the tree by hand and include a clear picture of it or use any drawing software (PowerPoint, etc.). d. Solve the tree step-by-step and determine the expected PW of the project.
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a Expected PW of the project without incentives Chance demand is real 60 If real annual profit is 12... View the full answer
Related Book For
Statistics For Business And Economics
ISBN: 9780321826237
12th Edition
Authors: James T. McClave, P. George Benson, Terry T Sincich
Posted Date:
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