Question

3. Detroit Edison Power (DE Tort Edison Power (DEP) power plant has to come in compliance with the new mercury standards bu dards by reducing its current annual mercury emission rate of 300 tons to 100 tons/year. s considering the following options to come in compliance. Assume that regulations are likely to change after four years so DEP planning only for next 4 years. It is considering the following a. Install Elu install Flue gas scrubbers (EGS) on its boiler FGS reduce mercury emissions by absorbing mercury in exhaust flue gases, FGS requires a capital investment of $800,000 m year zero and has a life of four years Annual costs of operating FGS are estimated at $100,000 per year. Install Electrostatic Precipitators (ESP) on the boilers. ESPs capture mercury particles along with other particulates, ESPs cost $400.000 to install and have a life of four years. ESPs also need electricity to run, which results in increased coal consumption in boilers of 5000 tons/year to supply the same amount of electricity, Coal prices are $ 50/ton and expected to remain at that level for the next four years, Collecting and disposing the particulates captured by ESPs is expected to increase annual operating costs by $10,000. Continue to operate as usual, but buy mercury emission permits from the market each year. The permit prices are expected to be $1600 per ton in year 1 and increase at the rate of 10% year. Which option should DEP choose? DEP uses a discount rate of 10% in its decisions. DEP is subject to 40% income taxes, and depreciation is charged at the rate of 25% of the initial capital investment each year? Please show all your intermediate steps and calculations clearly.

Answer 1

I have evaluated all the given options on the basis of present value of the given costs. Present value is calculated using discounting factors.Discounting factor is taken upto 3 decimal points and all other values have been rounded off.

Tax saving on cost has been considered while calculating net cost. It is assumed that tax saving will not be there on permit charges as it is an investment. So in option 3, tax saving isn't considered.

The option with least cost will be selected.

DATE [TABLE - A (figures in $. (A+B) @40%) Total cost saving cost Year Net Tax Calculation of Net cash outflow. (AS Initial operating (B) Investment cost Depreciation 8000 1 00000 200000 100000 20000 10000 20wo 10000 200000 enon Total cost 300000 300000 300000 300000 (12000) 1809 (1200) 180 (120000 18000 (120000 180 Calculation of Depreciation = gritial Investment/ value of asset Useful life of asset 8000$ 4 years = $200000 ( every year) Tax@yos will be saved on total cost (A+B) in table (Table of calculation of Net cash outflow) every yo

figures in Year 0 Calculation of Present Value of Net cash outflow a (A) (B @ 10%) Cost (& Discounting factor 8.0000 180000 0909 1900 0.826 18000 0.751 180000 0.683 (values from TABLE A) (AIB) Present value ($) 800000 163620 148680 13 S180 122940 2 3 13 70420 Total cost : 1370420 $

Initial Investment 400000 Calculation of T TABLE-BL Net Cash Outflow lilo (figures in $) @467) Coal consumption operating Total Tax Net (5000x 50$) Cost Depreciation cost saving cost 40000 2500 1000 100000 360000 14400 2600 25000 1000 1 000 36000 144000 21600 2800 1000 10000 3 000 144000 216000 250000 10000 100000 360000 14400021600 Calculation of Depreciation =) Value of Asset Initial Investment_ $400000 We asset чуу = $100.000 (every year Tax@yo") 'be saved on total cost. ar a Calculation of Present value of Net cash Inflow (from TABLE B) (ARB) (A Cost ($) (B) Discounting factor Present value 400000 4000 216000 0.909 1 96344 216000 0.826 178416 216000 0.751 162216 216000 0.683 147528 1084504 Total cost =1084504 $

(Amountin Calculation of of Net cash Present Value outflow CAL (B) (AXB) Year Permit charges (in $) Discounting factor Present Valued 2 200 tonnes : $1600 = 32000 0.gog 320000 +107.13200) = 352000 0.826 352000 H10).X35200) = 387200 0.751 387200 + (10).X3 8720) =495920 I 0.683 290880 290752 290787 290903 4 11 63323 Total cost = 1163 322

Option (b) is better as it has minimum cost $1084504. lie.