Consider that you need to determine how to power a load that will double after 3 years
Question:
Consider that you need to determine how to power a load that will double after 3 years of the initial operation. You have the option of buying enough DG units to power the initial load and the load increase in 3 years for $ 2M or you can buy enough for the initial load by $1M and buy the rest of the DG units in 3years. Consider that the annual inflation rate is 3%. You are financing your capital investment with a loan. Loans interest rate are a couple of points above a savings account interest rate which, in turn, is a couple of points above the inflation rate. Thus, the savings account rate is 5% and the loan's rate is 7%.
What should you do? You have 3 options, please solve all the three of them:
A. Get a loan today for $2M for all the present capacity plus the load increase in year 3.
B. Get a loan for $1M now to power the initial load and after 3 years an additional loan for $1M.
C. Get a loan today for $2M, use only what it is needed initially ($1M) and invest the rest until using it in year 3
Expert Answer:
The detailed answer for the above question is provided below Choosing the best option to power your load with future increase Heres an analysis of all ... View the full answer
