Bright Sun, a power generating firm, must decide whether to purchase a new battery that costs...

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Bright Sun, a power generating firm, must decide whether to purchase a new battery that costs $7 million. The battery can produce 15,000 MWh (megawatt hours) of power per year for five years beginning next year. After the fifth year, the battery breaks. Assume that the price of a MWh remains constant at about $100 and that the appropriate cost of capital is 8%. i) Should the firm buy the battery? Explain. ii) Would your answer change if the price of electricity rose to $200 per MWh? iii) To the nearest penny, find the minimum price of electricity per MWh that causes the firm to buy the battery. Bright Sun, a power generating firm, must decide whether to purchase a new battery that costs $7 million. The battery can produce 15,000 MWh (megawatt hours) of power per year for five years beginning next year. After the fifth year, the battery breaks. Assume that the price of a MWh remains constant at about $100 and that the appropriate cost of capital is 8%. i) Should the firm buy the battery? Explain. ii) Would your answer change if the price of electricity rose to $200 per MWh? iii) To the nearest penny, find the minimum price of electricity per MWh that causes the firm to buy the battery.

Answer rating: 100% (QA)

SOLUTION i To determine whether the firm should buy the battery we need to calculate the present value of the cash flows associated with the battery T... View the full answer