Question

please solve in excel sheet with cell references and show it .

Question 1 (based on Chapter 10) A city in the Midwest has made a decision to expand the electricity production in its area by building a new power plant. The city government must decide whether the plant will be powered by coal or whether the plant will be built on a river and use hydropower. The planning horizon is 40 years, and the assumed cost of capital is 7%. Compute a conventional B/C ratio, using AW, with disbenefits in the numerator for each of the two alternatives, determine which one should be chosen, and explain why The coal alternative would require a $50 million capital investment, a $500,000 annual operating expense, and bring about $2 million in annual operating revenue. In addition, the environmental harm and pollution impact caused by the plant is estimated to amount to $1 million annually. The plant is estimated to have a $400,000 worth of positive annual impact on the economic development of the city The hydroelectric alternative would require a $90 million capital investment, a $200,000 annual operating expense, and bring $1.5 million in annual operating revenue. The plant is expected to have no significant negative impact on the environment. The benefits of improved flood protection, water management, as well as fishing and recreation are expected to total $6 million annually.

Answer 1

Details provided : time horizon = 40 yrs, cost of capital = 7%,

Option A : Initial capital = 50 mln, annual operating cost = 500000, Annual operating revenue = 2 mln, annual environmental harm = 1 mln, annual positive impact = 400000

Option B : Initial capital = 90 mln, annual operating cost = 200000, annual operating revenue = 1.5 mln, annual positive impact = 6 mln

In Option A apart from initial capital net value created = (Annual revenue + annual positive impact - annual operating cost - annual environmental harm) = (2mln + 400000 - 500000 - 1 mln ) = 900,000

In Option B apart from initial capital net value created = (Annual revenue + annual positive impact - annual operating cost) = (1.5 mln + 6 mln - 200000 ) = 7.3 mln

B/C for option A = 900000/PW(50mln,7%,40yrs) = 900000/3750000 = 0.24

B/C for option B = 7.3mln / PW(90mln,7%,40yrs) = 1.08

Since B/C ratio for option 2 is greater than 1 option B should be opted.