Question
SuperPower Corp. employs coal to generate electricity. The firm purchases the right to generate electricity for the next three years in Texas. Each year, SuperPower
SuperPower Corp. employs coal to generate electricity. The firm purchases the right to generate
electricity for the next three years in Texas. Each year, SuperPower can produce 1,000 kilowatts.
The cost of coal is $100 per kilowatt, and the revenue per kilowatt is $150. The price of coal is
hedged and fixed at $100 for the next three years. The expected market risk premium is 7%. The
risk-free rate is 3.0%. The average beta of power companies in the S&P 500 is 0.72.
d. There is a cost for switching from natural gas to coal and vice versa. This cost is fixed at
$30,000. What is the value of the project? And what is the optimal strategy to use natural
gas vs. coal?
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