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Suppose the city of Edmonton is considering investing in a large scale solar panel electricity generation facility. They hire you as an economist to help
Suppose the city of Edmonton is considering investing in a large scale solar panel electricity generation facility. They hire you as an economist to help with this big decision. The city can construct this new facility at a cost of S500 today (time zero), net payoff of the facility is $40 per year for the next 20 years (assume it takes one year to build this plant). Suppose that the income stream from this investment is certain. The risk-free interest rate is 0.04. Should the city of Edmonton undertake this large investment? Show your work. Now. the city of Edmonton realizes there is a large amount of uncertainty associated this project. Suppose that the risk-free interest rate is .04, stock market return rate is .10. and all econometrician has determined that your asset beta is 0.8. Should the city of Edmonton undertake this large investment? Suppose the Edmonton government can sign a deal with the electricity market regulator for a higher fixed payment on future electricity generation output (these are called Purchase Power Agreements and are often used to incentivize investment in renewable technologies in practice). This rate brings the annual payoff up to $50 per-year and shields the company from some of the non-diversifiable volatility reducing the asset beta to beta = 0.6. Should they undertake the investment in this setting
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