Question

1. Suppose MSU has an opportunity to build a solar facility just outside of Ann Arbor that would generate about 120,000 MWh per year (1 MWh = 1000 KWh), and cost $25 million to install.

To determine if this is a good deal for the university, you need to analyze the economics. Assume the market price for electricity over the next five years is $48 per MWh and there is a 5-year project horizon. Evaluate this decision using a 3% discount rate. For this problem, assume that the costs of installing the solar panels occur at time 0 (beginning of year 1), and the benefits occur at the end of each subsequent year (end of year 1, end of year 2, etc.). The 5 year horizon implies that you only need to evaluate the gains of the solar project over a 5 year period. Solar panels obviously will provide benefits in the future if they remain installed, but you should ignore years beyond the 5^th year for this analysis.

The present value of the stream of costs is $ _______ million and the present value of the stream of benefits is $ ________ million.  
Options:

• 0; 28.8
• 25; 23.2
• 25; 26.4
• 25, 28.8

2. Use the data for the last question as you consider this question. Suppose Michigan State University sells the resulting renewable energy credits from this project on the market at the current price of renewable energy credits in Ohio of $5 per MWh. How much would Michigan State make each year selling renewable energy credits (RECs), and is this a benefit or a cost to the University?
Options:

• $0; benefit
• $120,000; benefit
• $600,000; benefit
• $0; cost
• $120,000; cost
• $600,000; cost

3. Should Michigan State sell the renewable energy credits? Discuss the pros and cons of selling renewable energy credits when there is no regulatory obligation to produce renewable energy.

4. If the social cost of carbon is $25 per MWh, what are the annual social benefits provided by MSU if MSU undertakes this project?
Options:

• $600,000
• $1,500,000
• $3,000,000
• $5,760,000

5. Should Michigan State use a 3% or a 7% interest rate when considering a solar project like this?

Answer 1

As per HOMEWORKLIB RULES, in case of multiple question posted by the student, we can only answer 1 question which by default is the first question , if not specified by the student. Please post other questions separately.

Answer to question 1

The answer is option 3 - 25 and 26.4.

Please refer to the below table for detailed calculations.

	All value in millions, USD
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Costs incurred	-25
Market price of electricity ($ per MWh)		48	48	48	48	48
Electricity Generated (inMWh)		1,20,000	1,20,000	1,20,000	1,20,000	1,20,000
Value generated in millions (market price * elect. Generated)		5.76	5.76	5.76	5.76	5.76
Present value (discounted @3%)		5.59	5.43	5.27	5.12	4.97
NPV of benefits (sum of above PV's)	26.38