Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A general contractor in the energy sector is considering a long-term Build-Operate-Transfer investment option for building an electricity generating powerplant project in Alberta. The minimum

image text in transcribed

A general contractor in the energy sector is considering a long-term Build-Operate-Transfer investment option for building an electricity generating powerplant project in Alberta. The minimum attractive rate of return (MARR) the company requires is 10%. The annual rate of inflation for years 1-5 is 1.8%, years 6-10 is 2.0%, years 11-12 is 2.3%, years 13-15 is 2.1%, years 16-20 is 2.2%. Construction will last 4 years, and then credercial operations would begin. Cash flows are as follows: Year(s) Items Cash Flows $400,000 Initial cost (mobilization, legal, initial deposits for suppliers to secure equipment and materials, site security, etc) 1-4 Construction costs Year 1: -$13,000,000 Year 2: -$30,000,000 Year 3: -$43,000,000 Year 4: -$14,000,000 5 Annual operating and maintenance costs $1,300,000 $ 6-20 Annual operating and maintenance costs (indexed / adjusted for rate of inflation) Previous year's O&M costs + rate of inflation adjustment 0 Revenue $15,000,000 $ 20 Remaining service value (RSV) ( $6,000,000 Note: RSV is similar to salvage value If the powerplant was operational right now, revenues would be approximately $15,000,000 this year alone. It is safe to assume that these revenues would rise with the cost of inflation for the following 5 years, then increasing at twice the pace of inflation for the following 5 years and settling at an annual growth rate of 2.5 times the rate of inflation for the remaining plant's service life. What is the NPV for the project. What is the Simple payback period for the project. What is the IRR for the project. . What is the BCR (benefit-cost ratio) for the project. Should they go ahead with the investment?? discuss why or why not

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Derivatives A Blessing Or A Curse

Authors: Simon Grima, Eleftherios I. Thalassinos

1st Edition

1789732468, 9781789732467

More Books

Students also viewed these Finance questions

Question

The likely effect on competition and reactions provoked.

Answered: 1 week ago