Introduction

Recently, I noticed that our powerplant was producing too much air pollution. I offered a few explanations to our senior executives in a meeting. I thought my ideas were good, so at first, I was surprised and disappointed that no one seemed interested in providing a solution to our power plants pollution concerns. Many months later, our powerplant was approached by the local government agency and was citied. The powerplants pollution was on record as being a problem for the small tourist island where it is located. At first, I was really upset that I was proactive and introduced the problem to senior executives months before, but the senior official took the current citation and acted as though the problem was brand new. Interestingly, I did not think to blame others, but rather wanted to identify a solution to the problem and present the idea to senior management. I knew I was relatively new at this position and had not yet earned the respect of my co-workers. I wanted to shed the rookie impression that my peers had of me and make a great impression on my peers and management. I wanted to be known as someone who could be counted on. I have always been competitive, thus, I wanted to be the best person in my position.

The Problem

The problem is that the powerplant is producing too much air pollution. The powerplant is located on a small vacation island and provides power to most of the island, however, technology has grown since the powerplant was built in the 1970s. My goal is to explain how option 2 can be a solution to solve this problem. I believe that by providing this solutions to the problem, I will enable our management to select a solution that they think is best for the company.

The Project Options (Solve Problem using this option)

Option 2: The powerplant could be shut down completely and we could install a power cable that runs from one of the other nearby islands that has a powerplant. This powerplant will still produce just as much pollution as the one on our island, but it is under a different government that does not care about air pollution. This would cost the cost our company $1,000,000 at the end of the year, $3,000,000 at the end of next year and $1,000,000 yearly thereafter for maintenance.

Market Conditions

The current market conditions have a 12 percent market risk premium on the powerplant with the risk-free rate being 5-percent. The local government has a fixed tax rate of 35 percent. Senior management will ask about the cost to raise capital and we will have to calculate the WACC.

The current capital structure of the company is as follows:

Debt 7,000 outstanding bonds, at 7.5% coupon and 20 years to maturity. These bonds pay interest semiannually and quoted a price of 108 percent of par.

Common Stock -180,000 shares outstanding, selling for $50 per share: Beta .90.

Preferred Stock 8,000 shares of 5.5 percent preferred stock outstanding, currently selling for $95.00 per share.

The Decision/Solution Requirments

The senior management team will expect me to report the cost of option 2. I will have to provide the calculations and thoughtful considerations of option 2s ideas and concepts presented in the case to offer new thoughts and insights relating directly to this topic. I will have to support my answers with calculations that will provide the best solution to the problem. I know that in the past, senior management has historically chosen the cheapest options to solve problems and will expect to see all financial models in Excel documents while also providing a narrative explaining how option 2 could potentially solve the problem.

( Please Provide Excel illustrating calculations)