Question

American Electric Power agreed to spend $4.6 billion to clean up 46 coal-fired power plants that are believed to be contributing to acid rain. The plan is to reduce nitrogen oxide emissions by 69% by 2016 and sulfur dioxide emissions by 79% by 2018. Assume Plan A is to spend $0.575 billion per year in years 1 through 4 and an additional $0.575 billion per year in years 7 through 10. Plan B is to spend $0.46 billion in each of years 1 through 10. At an interest rate of 8% per year, which plan is more economical to the company based on a present worth analysis?

I need this problem completed in Microsoft Excel with all formulas used to achieve the answer clearly shown.

Answer 1

Present value of amounts to be spent in each of the projects is as follows:

Project A: $4.30 billion

Project B: $1.98 billion

Since the Present value of amounts to be spent is less for project B, the same is more economical.

Detailed calculation below:

G15 RESUM(G5:614) A B C D E F 1 Interest rate= 8% Amount in $ billion 2 Year Int rate PV Factor Plan A Plan B 3 (t) (PVF) Cash Flow PV Cash Flow PV =1/(1+r)^t (CF) (CF*PVF) (CF) (CF*PVF) 8% 0.925926 0.575 0.53 0.460 0.24 8% 0.857339 0.575 0.49 0.460 0.23 8% 0.793832 0.575 0.46 0.460 0.21 8% 0.735030 0.575 0.42 0.460 0.19 8% 0.680583 0.00 0.460 0.00 8% 0.630170 0.00 0.460 0.00 8% 0.583490 1.150 0.67 0.460 0.31 8% 0.540269 1.150 0.62 0.460 8% 0.500249 1.150 0.58 0.460 0.26 14 10 8% 0.463193 1.150 0.53 0.460 0.25 15 Sum of PVS 4.30 1.981 covou WN 0.29