SO2 Control at Brayton Point Sythe Electric Co. must decide whether to install a fluegas desulfurization unit (FGD, or scrubber) to reduce sulfur dioxide emissions from its Brayton Point electric generating station. The plant currently has no such pollution control equipment, and must buy SO2 permits to cover its emissions at an annual cost of $500,000. The cost of installing the scrubber is $10 million; when installed, the need for buying 3 pollution permits will be eliminated. For every year that Sythe does not install the scrubber, it will have to purchase permits, and the demand for electricityand therefore SO2 permitsis projected to grow at an annual rate of 5%.

Assume that the plant managers base their decisions on a fiveyear capital budgeting cycle (i.e., time is t = 0, 1, 2, ..., 5, where t = 0 is now), and that changes in regulations mean that Sythe has to buy the scrubber within a 5year grade period (i.e., by t = 5).

FGDs are huge pieces of capital equipment that require time to build and bring on line, so if the scrubber is installed in year t, permits must be purchased for that year as well.

(a) If Sythe can get a 6 percent return on alternative investments, should the company install the scrubber now, or, if not, how long should it wait? (b) What would the annual rate of return have to be for immediate installation of the scrubber to be costeffective?