REQUIRED:

What is the budgeted life-cycle cost per unit for product X1?

1.2. Based on the information provided below, answer the following questions. (9 marks)

INFORMATION:

Frontier Power Systems (FPS) generates and sells electricity in an African country. It operates two types of power station: coal and wind.

The costs and output of the two types of power station are as follows:

Coal power station

Frontier Power Systems operates a coal power station comprising six units which can generate 5 000 gigawatts of electricity and has a useful life of 50 years. The operating costs average R500 million per year, inclusive of annual depreciation of R200 million for the recovery of the R10 billion incurred in building the power station. The power station has an estimated decommissioning cost of R400 million at the end of its life.

Wind station

The wind station generates 2 000 gigawatts of electricity per year. It has a life-cycle cost of R550 000 per gigawatt and an average operating cost of R400 000 per gigawatt over its 20-year life.

REQUIRED:

1.2.1. Calculate the life-cycle cost per gigawatt of the coal power station (tabulate all calculations). (5)

1.2.2. Suppose that Frontier Power Systems has set a price to earn an operating margin of 40% over the life of the wind station, what will be the total lifetime profit per the wind station. (4)