You need to erect a power plant. It can be solar or coal-fired. Both produce the...
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You need to erect a power plant. It can be solar or coal-fired. Both produce the same quantity of electricity, both have a life expectancy of 10 years, and there are no taxes. The solar powerplant has an expected initial cost of 2,500 and an annual cost of upkeep of 50. The relevant cost of capital is 7%. The thermal powerplant costs 750 to erect, but its annual cost (coal and upkeep) is 300. Its cost of capital is 6%. a) Under existing conditions, and assume that you build only one of the two alternatives, which would you prefer? Why? Show the NPV comparison. (8 Points) The coal company convinces the government to pass a law that imposes the construction of the thermal now, whatever the NPV. b) One year later, the forced construction of coal fired plants is rescinded, but the coal plant is already up and running for one year. The construction costs of a new solar is down by 5%, all other costs remain the same. It is also discovered that the life of the coal plant can be extended to 10 years rather than the remaining 9 by investing 200 in 6 years from the new time point. Being now again free to choose, will society keep the coal plant or switch? Show me the NPV calcs to support your conclusion. (7 Points) You need to erect a power plant. It can be solar or coal-fired. Both produce the same quantity of electricity, both have a life expectancy of 10 years, and there are no taxes. The solar powerplant has an expected initial cost of 2,500 and an annual cost of upkeep of 50. The relevant cost of capital is 7%. The thermal powerplant costs 750 to erect, but its annual cost (coal and upkeep) is 300. Its cost of capital is 6%. a) Under existing conditions, and assume that you build only one of the two alternatives, which would you prefer? Why? Show the NPV comparison. (8 Points) The coal company convinces the government to pass a law that imposes the construction of the thermal now, whatever the NPV. b) One year later, the forced construction of coal fired plants is rescinded, but the coal plant is already up and running for one year. The construction costs of a new solar is down by 5%, all other costs remain the same. It is also discovered that the life of the coal plant can be extended to 10 years rather than the remaining 9 by investing 200 in 6 years from the new time point. Being now again free to choose, will society keep the coal plant or switch? Show me the NPV calcs to support your conclusion. (7 Points)
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Lets first address part a of the question We have two projects a solar power plant and a thermal coalfired power plant We will calculate the Net Present Value NPV for both projects to determine which ... View the full answer
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Accounting What the Numbers Mean
ISBN: 978-0073527062
9th Edition
Authors: David H. Marshall, Wayne W. McManus, Daniel F. Viele,
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