Question

Problem #1 (30 marks) A general contractor in the energy sector is considering a long-term Build-Operate-Transfer investment option for building an electricity generating powerplant project in Alberta. The minimum attractive rate of return (MARR) the company requires is 15%. The annual rate of inflation for years 1-5 is 1.9%, years 6-10 is 2.1%, years 11-12 is 2.2%, years 13-15 is 2.25%, years 16-20 is 2.0%. Calculate the NPV, IRR, and BCR (benefit-cost ratio) with the following cash flows: Year(s) Items Initial cost Construction costs 1.4 Cash Flows -$300,000 Year 1: $14,000,000 Year 2: -$34,000,000 Year 3: $40.000.000 Year 4: $12,000,000 $1.200.000 Previous year's O&M costs 5 6-20 Annual operating and maintenance costs Annual operating and maintenance costs indexed / adjusted for rate of inflation) Annual revenue 5-20 $16,000,000 CPMT 3130 DIE Cost Planning and Control 20 . Remaining service value (RSV) $8,000,000 Note: RSV is similar to salvage value Should they go ahead with the investment?? Why or why not?

Answer 1

Calculation of NPV of the Project
Particulars	Year (n)
0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
Initial Investment
Initial Cost	-300000
Construction Costs		-14000000	-34000000	-40000000	-12000000
Salvage Value																					8000000
Net Investment	-300000	-14000000	-34000000	-40000000	-12000000	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	8000000
Operating Cashflows
Annual Revenue						16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000	16000000
-Annual Operating and maintenance costs						-1200000	-1225200	-1250929	-1277199	-1304020	-1331404	-1360695	-1390630	-1421920	-1453913	-1486626	-1516358	-1546686	-1577619	-1609172	-1641355
Net Revenue						14800000	14774800	14749071	14722801	14695980	14668596	14639305	14609370	14578080	14546087	14513374	14483642	14453314	14422381	14390828	14358645
Total Cashflows	-300000	-14000000	-34000000	-40000000	-12000000	14800000	14774800	14749071	14722801	14695980	14668596	14639305	14609370	14578080	14546087	14513374	14483642	14453314	14422381	14390828	22358645
Discount factor @15%	1	0.8695652	0.7561437	0.6575162	0.5717532	0.497177	0.432328	0.375937	0.326902	0.284262	0.247185	0.214943	0.186907	0.162528	0.141329	0.122894	0.106865	0.092926	0.080805	0.070265	0.0611
Discounted Cashflows	-300000	-12173913	-25708885	-26300649	-6861039	7358216	6387554	5544722	4812910	4177515	3625853	3146619	2730596	2369346	2055779	1783614	1547791	1343087	1165402	1011176	1366119
Net present Value	-20918188
IRR	10%

Benefit Cost ratio = Total Benefits after discounting / Total Costs after discounting

= 50426298 / 71344486

= 0.7068

Project cannot be accepted because

1. NPV is negative

2. IRR is less than required rate of return

3. Benefit cost ratio is less than 1