Question

UUUULUULULLU OLL PIUSI Imagine that, with a discount rate of 5 percent, the net present value of a hydroelectric plant with a life of 70 years is $25.73 million and that the net present value of a thermal electric plant with a life of 35 years is $18.77 million. Rolling the thermal plant over twice to match million)/(1 + 0.05)38 = $22.17 million. Now assume that at the end of the first 35 years, there will be an improved second 35-year plant. Specifically, there is a 30 percent chance that an advanced solar or nuclear alternative will be available that will increase the net benefits by a factor of three, a 60 per- cent chance that a major improvement in thermal technology will increase net benefits by 50 percent, and a 10 percent chance that more modest improvements in thermal technology a. Should the hydroelectric or thermal plant be built today?

Answer 1

The hydroelectric or thermal plant may be built today as there is only a 30 percent chance that an advanced solar or nuclear plant will be available after a period of the first 35 years of the life of the original plants. Thirty five years is basically three and a half decade. Within this time period, times usually fully change. Currently there is only 30 percent chance of the coming of advanced alternative of solar or nuclear plant. Within the time period of first 35 years, there is no other option left. Thus, the hydroelectric or thermal plant may be built today which has a life of seven decades.