Question
Minnesota's energy department is trying to decide how to expand the State's energy pro- duction. One option is to set up wind mills with an
Minnesota's energy department is trying to decide how to expand the State's energy pro- duction. One option is to set up wind mills with an expected lifetime of 10 years. Another is to make a solar energy farm with an expected lifetime of 12 years. The wind mills initiative would cost $80,000,000 to construct and yield net benefits of $20,000,000 at the end of each year, for 10 years. The solar energy farm initiative would cost $30,000,000 to construct and yield net benefits of $5,000,000 at the end of each year, for 12 years. Each project is assumed to have zero salvage value at the end of its life. Using a real discount rate of 2 percent, which project offers larger net benefits? Approach the problem using the Roll-Over and the Equivalent Annual Net Benefit methods.
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