Question

Florida Power and Light has committed to building a solar power plant. An engineer that works in FLP, has been tasked with evaluating the three current designs. FLP uses an interest rate of 10% a 20 years horizon.

Design 1: A field of “flat” solar panels angled to best catch the sun will cost $87 million initially with firstyear operating costs at $1.8 million, growing $250,000 annually. It will produce electricity worth $7.8 million the first year and will increase by 8% each year thereafter.

Design 2: A field of mechanized solar panels rotates from side to side that they are always positioned parallel to the sun’s rays, maximizing the production of electricity. The design cost $101 million initially with first year operating costs at $2.3 million, growing $300,000 annually. It will produce electricity worth $8.8 million the first year and will increase 8% each year thereafter.

Design 3: This design uses a field of mirrors to focus the sun’s rays onto a boiler mounted in a tower. The boiler then produces steam and generates electricity the same way a coal-fired plant operates. This system will cost $91 million initially with first year operating costs at $3 million, growing $350,000 annually. It will produce electricity worth $9.7 million the first year and will increase 8% each year thereafter.

a) Calculate the net cash flows for every year and find the NPW and AW for each design. Which design should the engineer select? (50 points) b) Figure the IRR for each design. Does your decision change based on IRR criterion? (25 points) c) Figure the Benefit/Cost ratio for each design. Does your decision change from the one made on part a? (25 points)

Answer 1

a) Please refer to Column D in below screenshots which shows the calculation of net cash flows for every year of Design 1, 2 & 3. Further below table shows NPW & AW for Design 1, 2 & 3, for detailed calculation please refer to below screenshots.

	Design 1	Design 2	Design 3
NPV	$ 3,623,441.23	$ (2,044,765.20)	$ 13,048,423.52
AW	$    425,608.05	$    (240,177.35)	$   1,532,662.93

Decision: NPW & AW of Design 3 is higher than Desgin 1 & 2, hence engineer should select design 3.

b) Below table shows the IRR of Design 1, 2 & 3, for detailed calculation please refer to below screenshots.

	Design 1	Design 2	Design 3
IRR	10.45%	9.78%	11.50%

Decision: IRR of Design 3 is higher than Desgin 1 & 2, hence our decision is same as earlier i.e. engineer should select Design 3.

c) Below table shows the Benefit cost ratio of Design 1, 2 & 3, for detailed calculation please refer to below screenshots.

	Design 1	Design 2	Design 3
Benefit Cost Ratio	1.04	0.98	1.14

Decision: Benefit Cost Ratio of Design 3 is higher than Desgin 1 & 2, hence our decision is same as earlier i.e. engineer should select Design 3.

below screeshot shows the formula used for above calculations for Design 1, 2 & 3:

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