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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
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
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