Question

A small local power plant (LPP) is being considered in a North American location known for its high temperature. Power can be produced based on this temperature. With high costs of fossil fuels, this particular LPP may be economically attractive to investors. For an initial investment of $100k, annual net revenues are estimated to be $20k in year 1 and increase by 10k each year until year 5. With the LPP's MARR at 8% per year and using the PW method, what is the value at the acceptable dicounted payback period for this project? For example, if the payback period is 3 years, find the corresponding cumulative present value of all the cash flows up to year 3. Round value to the nearest integer.

Answer 1

Initial Investment = 100,000

Annual Net Revenues = 20,000 in year 1 and increases by 10,000 each year

Life = 5 years

Discount Rate = 8%

Calculate the Discounted Pay Back Period

Year	CF	PV Factor	DCF	CCF
0	$-100,000	1	$-100,000	$-100,000
1	$20,000	0.93	$18,518.52	$-81,481.48
2	$30,000	0.86	$25,720.16	$-55,761.32
3	$40,000	0.79	$31,753.29	$-24,008.03
4	$50,000	0.74	$36,751.49	$12,743.47
5	$60,000	0.68	$40,834.99	$53,578.46

Discounted Payback Period = 6 + [$-24,008.03 – 0 ÷ $-24,008.03 – $12,743.47)]*1 = 3.65 years

The acceptable discounted pay back period for this project is 3.65 years.

Round to nearest integer, it will be 4 years