A town estimates that it will cost $160 million to design and construct a new water treatment
Question:
A town estimates that it will cost $160 million to design and construct a new water treatment plant and $12.5 million per year to maintain the plant which is expected to last for 10 years. The plant would be constructed over the course of year 0 and maintenance costs commence in year 1. During year 5, plant equipment will need to be replaced at a capital cost of 20 million. (The average wastewater plant life expectancy is between 40 – 50 years, but for simplicity, we assume only 10 years). Analysts estimate that the benefits of the new plant will total $50 million in the first year of operation (year 1), $45 million in year 2, $35 million in the next 3 years and $33 million in each of the final 5 years of its life.
1. Given these cost and benefit estimates, is the project feasible using a discount rate of 8%? Use the Excel template provided to find the project’s net present value. I have completed the calculations for 2 cells for those unfamiliar with using formulas in Excel. YOU MUST UPLOAD YOUR COMPLETED EXCEL FILE.
2. If it is not feasible at 8%, how much would the initial capital costs (in year 0) need to be reduced to make it feasible??
3. Would the project be feasible if a discount rate of 7% was used? Use a new template to determine the NPV. YOU MUST UPLOAD YOUR COMPLETED EXCEL FILE.
Construction accounting and financial management
ISBN: 978-0135017111
2nd Edition
Authors: Steven j. Peterson