31. Project Evaluation. In the Finance in Practice box on page 273 we described a major invest- ment in windpower by MidAmerican Energy. Suppose that the company is now contemplating construction of a gas-fired power plant. The plant is likely to last 25 years and to have no salvage value. Depreciation allowances for tax purposes on the investment of $386 million will be calcu- lated using the 20-year MACRS schedule.

If the plant could be operated 24 hours a day every day, it would produce each year 6.04 million megawatt-hours (MWh) of electricity. However, a more realistic estimate is that the plant will operate at an average of 60% of this notional capacity. In the first year of opera- tion, the price of electricity is expected to average $66 per MWh, fuel costs are expected to be $38 per MWh, and labor and other costs are forecast to total $45 million. All prices and costs are expected to rise with inflation at 3% a year. The corporate tax rate is 35%. If the cost of capital is 12%, would you recommend that the company go ahead with the proj- ect? (LO2)