Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

All informations given have been provided in the 2 images uploaded 1. ( 50 points) In this exercise you are asked to calculate the net

image text in transcribed

image text in transcribed

All informations given have been provided in the 2 images uploaded

1. ( 50 points) In this exercise you are asked to calculate the net present value (NPV) of a project to build a new solar farm in agricultural land close to a residential area. Assume, for simplicity that prices will remain constant during the lifetime of the project. - The solar farm will have a capacity of 20MW. - The space requirements (equipment and space between panel rows) are of 7 acres per MW. - The project will be located on farmland whose rental value is $500 per acre per year. Assume, however, that the solar farm developers own the land. - Assume that all the necessary approvals and contracts for siting and permitting have already been completed. (When a power plant is proposed on private land, various state and local agencies must grant the necessary approvals prior to construction, and there may be fierce local opposition - a NIMBY response. The siting and permitting process can take more than three to five years to complete.) - Construction of the solar farm will take one year, and the installation cost of the equipment (including labor) is $0.9/ watt. - After the farm is completed and online (one year after the start of construction), it requires little maintenance, in the order of $5,000 per year. - Assume that the lifespan of the farm is 40 years. - After its useful life, the farm will be decommissioned (in year 41) at a cost of $300,000 MW. - Given the solar power potential of the area and the going rate for solar generation in the wholesale market you can expect an annual revenue of $45,000 /MW per year. - Electricity generated in the solar farm will replace electricity generated using coal, implying that greenhouse gas emissions are avoided at a factor of 0.00101219tCO2 eq/kWh. This is a global, social benefit of the project. Use the mean social cost of carbon estimate in the study by Rennert et al. (2022). - Objectors to the solar farm have protested about the visual impact of the farm. This is a local, social cost of the project. The local government has commissioned a non-market valuation study among local residents, and the results suggest that the mean annual compensation demanded by locals is $20 /household; (this mean is calculated across both those against the project and those in favor). There are 1,000 households thought to be affected. a) Construct a table detailing the social costs, social benefits, and social net benefits from years 041. ( 25 points) b) What is the NPV of the project at a 2 percent discount rate? (10 points) c) What is the NPV of the project at alternative discount rates of 1 percent and 3 percent? Comment on the sensitivity of the NPV calculations to the choice of discount rate. (5 points) d) What is the NPV of the project (at the different discount rates above) if we only consider the private profitability of the developers (that is, we ignore the social costs and benefits)? (5 points) Comment on the sensitivity of the project to the inclusion of social benefits and costs vis--vis the sensitivity to the discount rate. (5 points) 1. ( 50 points) In this exercise you are asked to calculate the net present value (NPV) of a project to build a new solar farm in agricultural land close to a residential area. Assume, for simplicity that prices will remain constant during the lifetime of the project. - The solar farm will have a capacity of 20MW. - The space requirements (equipment and space between panel rows) are of 7 acres per MW. - The project will be located on farmland whose rental value is $500 per acre per year. Assume, however, that the solar farm developers own the land. - Assume that all the necessary approvals and contracts for siting and permitting have already been completed. (When a power plant is proposed on private land, various state and local agencies must grant the necessary approvals prior to construction, and there may be fierce local opposition - a NIMBY response. The siting and permitting process can take more than three to five years to complete.) - Construction of the solar farm will take one year, and the installation cost of the equipment (including labor) is $0.9/ watt. - After the farm is completed and online (one year after the start of construction), it requires little maintenance, in the order of $5,000 per year. - Assume that the lifespan of the farm is 40 years. - After its useful life, the farm will be decommissioned (in year 41) at a cost of $300,000 MW. - Given the solar power potential of the area and the going rate for solar generation in the wholesale market you can expect an annual revenue of $45,000 /MW per year. - Electricity generated in the solar farm will replace electricity generated using coal, implying that greenhouse gas emissions are avoided at a factor of 0.00101219tCO2 eq/kWh. This is a global, social benefit of the project. Use the mean social cost of carbon estimate in the study by Rennert et al. (2022). - Objectors to the solar farm have protested about the visual impact of the farm. This is a local, social cost of the project. The local government has commissioned a non-market valuation study among local residents, and the results suggest that the mean annual compensation demanded by locals is $20 /household; (this mean is calculated across both those against the project and those in favor). There are 1,000 households thought to be affected. a) Construct a table detailing the social costs, social benefits, and social net benefits from years 041. ( 25 points) b) What is the NPV of the project at a 2 percent discount rate? (10 points) c) What is the NPV of the project at alternative discount rates of 1 percent and 3 percent? Comment on the sensitivity of the NPV calculations to the choice of discount rate. (5 points) d) What is the NPV of the project (at the different discount rates above) if we only consider the private profitability of the developers (that is, we ignore the social costs and benefits)? (5 points) Comment on the sensitivity of the project to the inclusion of social benefits and costs vis--vis the sensitivity to the discount rate. (5 points)

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

International Fraud Handbook

Authors: Joseph T. Wells

1st Edition

1118728505, 9781118728505

More Books

Students also viewed these Accounting questions

Question

Writing a Strong Introduction

Answered: 1 week ago