***> EXCEL PROBLEM
A new pharma company is building a plant in Virginia, and they are evaluating various flood control measures as they have seen problems during construction that indicate they will have problems later. The company is look at 4 options below and since they are cash strapped, they are looking at this analysis with an 18% required return and a 15-year life. Which Option would you recommend? Option 1. Full System - Has large water retention pond, sump pumps, generator for backup power. It will cost $1,800,000, and require annual maintenance/testing of $15,000, but prevent damage from a 100-year flood, so we will assume No damage cost. Option 2. Partial System - Has a medium retention pond and sump pumps, but no backup generator. It will cost $600,000 and require annual maintenance of $5,000. There is a 5% chance (assume annually) that the plant will still have outages/damage from a major storm that could cost $3,500,000 Option 3 Minor System - Has a medium retention pond and no sump pumps, but no backup generator. It will cost $300,000 and require annual maintenance of $1,000. There is a 10% chance (assume annually) that the plant will still have outages/damage from a major storm that could cost $5,500,000 Option 4 No System - Wait and See. There is a 15% chance (assume annually) that the plant will still have outages/damage from a major storm that could cost $6,500,000. A new pharma company is building a plant in Virginia, and they are evaluating various flood control measures as they have seen problems during construction that indicate they will have problems later. The company is look at 4 options below and since they are cash strapped, they are looking at this analysis with an 18% required return and a 15-year life. Which Option would you recommend? Option 1. Full System - Has large water retention pond, sump pumps, generator for backup power. It will cost $1,800,000, and require annual maintenance/testing of $15,000, but prevent damage from a 100-year flood, so we will assume No damage cost. Option 2. Partial System - Has a medium retention pond and sump pumps, but no backup generator. It will cost $600,000 and require annual maintenance of $5,000. There is a 5% chance (assume annually) that the plant will still have outages/damage from a major storm that could cost $3,500,000 Option 3 Minor System - Has a medium retention pond and no sump pumps, but no backup generator. It will cost $300,000 and require annual maintenance of $1,000. There is a 10% chance (assume annually) that the plant will still have outages/damage from a major storm that could cost $5,500,000 Option 4 No System - Wait and See. There is a 15% chance (assume annually) that the plant will still have outages/damage from a major storm that could cost $6,500,000
