Great Lakes utilities is deciding if it should build an oil or a coal generating plant. Its weighted average cost of capital is 8% for low-risk projects 10% for projects of average risk and 12% for high-risk projects. Management believes that an oil plant is of average risk but that a coal plant is of high risk. The cash outflows required to construct each plant are listed below. The revenue, fuel costs and other operating costs are expected to be the same under both plans.

Construction Cost (Shs`000')

Year Coal Plant Oil Plant

0 100 400

1 500 1,000

2 1,500 1,000

3 1,500 1,000

4 1,500 1,500

5 1,000 1,000

6 500 200

Required:

Which type of plant should be constructed? (20 marks)

Show your workings.