The proposed nine microgrids will be built in 2019 and satisfy the need for increased coastal resilience if the project passes the NPV test in a Benefit Cost Analysis. The microgrids have a construction cost of $18 million, 70% of which will be spent in the year the project starts and 30% in the next year. The project will cost the state $ 250,000 to maintain and operate each year starting with year 1. The benefits of the project are estimated at $3 million each year starting with year 1. The microgrids are losing efficiency with increased use and that makes the benefits decline at a constant rate of 3% each year. However, the rate of decline can be higher (5.5%) or lower (1.5%) depending on the assumption of the number of extreme weather events that will take place during the life time of the microgrids. The system is expected to last 15 years before major components need to be replaced. State regulations require the use of a nominal interest rate of 7%. The average inflation rate has been estimated at 2.5% but it may be low as 1% or as high as 3%. The state expects to incur a cost of disposing safely of the microgrids’ components in year 15. Many of these components contain elements that are hazardous to human health and the environment. The safe disposal cost was estimated at $300,000 but this estimate comes from a range of $150,000 and $1 million.

a. (29pts) Compute NPV for the nine-microgrid project and make a recommendation to the governor of CT.

b. (10pts) Conduct a Best and Worst Case Sensitivity Analysis (hint: this requires testing all your assumptions that have ranges) . How, if at all, will NPV and your recommendation change due to this uncertainty? (Computations needed)

c. (1pts) Find the IRR of this project.

d. (10pts)The NPV estimated above was based on the assumption that the annual benefits are certain. However, consider that the benefits of the microgrids are based on whether or not an extreme weather event occurs and the state uses the microgrids as a way to deal with power outages in the affected areas. The state does not trust this annual benefit estimate and wants to perform an analysis and find the NPV based on an expected value of annual benefits. The state already estimated that when there is an extreme whether event such as a Category 4 super storm, the benefits from the microgrids will be $2million annually, for a Category 3 storm, benefits will be $1.2 million annually, and for a Category 2 or less storm the benefits will be of $500,000 each year. Probabilities of the three event categories are presented below. Further, assume that there is no rate of decline in benefits but all other parameters and assumptions stay the same as described above. How does the NPV change?