Question

Q5. You have been hired to analyze the costs and benefits of constructing a new power plant for a large corporate campus. The plant will be adjacent to the campus to ensure a reliable power supply, and the alternatives are laid out below. Assume that the upfront construction costs are paid today and that the decadal operation and maintenance costs are paid in year 10. Also assume the timeline of the project is such that you are only concerned with the next 19 years, meaning that you'll only have to pay the maintenance costs once. by power plant 500 cal air quality ben d) Using the information from part b and the benefits described above, solve for the dynamically efficient solution. roe Upfront construction costs (S cadal operation an maintenance costs ($) a) Will a higher or a lower discount rate make you more likely to recommend the hydroelectric plant? Explain. el You mention to the corporate economist that, if the chosen power plant really is econamically efficlent, building it must be (circle any/all that applyl A potential pareto improvement A pareto improvement A. b) The corporation announces that it will use a 5% discount rate for this project. What is the net present value of the costs outlined above for the coal-fired plant and the hydroelectric plant? Please include the equation you used to calculate the values. 8. f) In line with part e, is it likely that everyone on the corporate campus will be happy with the efficient choice? Explain using the specific costs and benefits listed in the tables. c Considering only the present value of costs calculated in part (b), which project should be selected? What does this assume about the benefits of each project? gl In a short paragraph, describe a policy you might recommend to the corporation that would allow the efficient power plant to be built, but would benefit everyone on the campus. Now assume the total present value of benefits of the two projects are as follows:

Answer 1

I'm taking 10 percent and 5 percent as the discounting factor which gives us the total cost as mentioned below. We can see that even a change in discounting factor leads to lower cost for coal fired plant. The table also depicts the npv of the costs which are to be incurred for project at different discounting factor rates. By taking a decision based on the npv of costs we are going irrespective of benefits as cost incurred is lower but a proper cost benefit analysis is to be made

Particulars	coal fired plant cost	hydroelectric plant cost
@5 percent discounting factor	2736.8(2000+(1200*(1/(1.05)^10)))	3184.2(3000+(300*(1/(1.05)^10)))
@10 percent discounting factor	2463.2(2000+(1200*(1/(1.1)^10)))	3115.8(3000+(300*(1/(1.1)^10))