Question 2 (25 points): Calculate expected NPV for a min ROR 10% to evaluate the economic potential of an energy project with the following estimated costs, revenues and success/failure rates. Is this investment economically satisfactory? To lease the land at $300k at time zero To build and construct site for $600k by the end of year 1. It is considered 100% to happen. At the end of year 1, there is a 40% chance that project will be shelved with no salvage value and no liabilities. At the end of year 1, there is a 60% probability that the project will be given a go ahead with an additional $400k for project completions. Then two possible outcomes: 40% probability to generate a net income of $550k per year for years 2-15 with an environmental remediation cost of $100,000 at the end of the project. 50% probability to generate a net income of $350k per year for years 2-15 with an environmental remediation cost of $100,000 at the end of the project. 10% probability to fail and sell at $350k at the end of year 2. Question 3 (25 points): A project needs an investment of S30k at time zero and $15k at the end of year 1. It is expected to generate a net income of $15k for year 1 to 8. At the end of gth year, it is expected to incur an environmental cost of $30k and a salvage value of S20k. Please calculate NPV at a minimum DCFROR of 20%. Then evaluate the probability for the project to be economically satisfactory and the most likely NPV to be achieved. Hint: One may analyze the sensitivity NPV to the following parameters and then plot cum probability vs. NPV. . Costs (+/- 40%) Incomes (+/- 30%) Salvage value (+/-20%) Environmental Cost (+/- 30%) Project life (+/- 50%) Plot a tornado diagram Rank the five uncertain parameters based on the NPV sensitivity analysis Question 4 (25 points): An investment project requires the investment costs of $120,000 at the present time and an additional investment of $120,000 at year 1. Annual operating expenses (OPEX) is $6,000 (starting from year 2). There are three possible outcomes for this project: 15% probability of success with an annual income of $200,000 from year 2 to 10. At then end of 10th year, there is a salvage value of $60,000 and environmental remediation cost of $70,000. 50% probability of success with an annual income of $120,000 and an annual environmental remediation cost of $10,000 from year 2 to 7. Salvage value is $60,000 at the end of year 7. 35% probability of failure with zero income, no environmental remediation cost, and a salvage value of $250,000 at the end of year 2. Calculate expected IRR and conclude if this is a recommended investment considering a minimum rate of return of 12.5%. Question 2 (25 points): Calculate expected NPV for a min ROR 10% to evaluate the economic potential of an energy project with the following estimated costs, revenues and success/failure rates. Is this investment economically satisfactory? To lease the land at $300k at time zero To build and construct site for $600k by the end of year 1. It is considered 100% to happen. At the end of year 1, there is a 40% chance that project will be shelved with no salvage value and no liabilities. At the end of year 1, there is a 60% probability that the project will be given a go ahead with an additional $400k for project completions. Then two possible outcomes: 40% probability to generate a net income of $550k per year for years 2-15 with an environmental remediation cost of $100,000 at the end of the project. 50% probability to generate a net income of $350k per year for years 2-15 with an environmental remediation cost of $100,000 at the end of the project. 10% probability to fail and sell at $350k at the end of year 2. Question 3 (25 points): A project needs an investment of S30k at time zero and $15k at the end of year 1. It is expected to generate a net income of $15k for year 1 to 8. At the end of gth year, it is expected to incur an environmental cost of $30k and a salvage value of S20k. Please calculate NPV at a minimum DCFROR of 20%. Then evaluate the probability for the project to be economically satisfactory and the most likely NPV to be achieved. Hint: One may analyze the sensitivity NPV to the following parameters and then plot cum probability vs. NPV. . Costs (+/- 40%) Incomes (+/- 30%) Salvage value (+/-20%) Environmental Cost (+/- 30%) Project life (+/- 50%) Plot a tornado diagram Rank the five uncertain parameters based on the NPV sensitivity analysis Question 4 (25 points): An investment project requires the investment costs of $120,000 at the present time and an additional investment of $120,000 at year 1. Annual operating expenses (OPEX) is $6,000 (starting from year 2). There are three possible outcomes for this project: 15% probability of success with an annual income of $200,000 from year 2 to 10. At then end of 10th year, there is a salvage value of $60,000 and environmental remediation cost of $70,000. 50% probability of success with an annual income of $120,000 and an annual environmental remediation cost of $10,000 from year 2 to 7. Salvage value is $60,000 at the end of year 7. 35% probability of failure with zero income, no environmental remediation cost, and a salvage value of $250,000 at the end of year 2. Calculate expected IRR and conclude if this is a recommended investment considering a minimum rate of return of 12.5%
