Question

A solar sea power plant (SSPP) is being considered in North American location known for its high temperature ocean surface and its much lower ocean temperature 90 meters below the surface. Power can be produced based on this temperature differential. The initial investment is $90 million. Net annual revenues are estimated to be $12 million in years 1-5 and increasing with $7 million every coming years 6-18 and then continues the same as previous until the end of the project’s useful life. Assume residual market value for SSPP is $4 million at the beginning of twenty second year. The MARR is 7% per year. a. Draw the cash-flow diagram of this project. b. Use the FW method to determine the feasibility of this project.

Answer 1

Answer a :-

Note :-

1) An investment expenditure of 90 million is done at the starting of year .

2) From the end of year 1 to year 5 annual revenues are 12 million which subsequently increases by 7 million each year.

3) The revenue for the 19th year is the sum of annual revenue which is same as the 18th year that is the previous year and Salvage value of the project.

Answer b :-

FV = Cash flow *FV factor

FV factor =(1+i)ⁿ

Where ,

i =7%

n = number of year

Using the above formula following is the future value table :-

Year	CF	FV factor	Future value
0	(90)	-	(90)
1	12	1.07	12.84
2	12	1.14	13.68
3	12	1.225	14.7
4	12	1.310	15.72
5	12	1.402	16.82
6	19	1.500	28.5
7	26	1.605	41.7
8	33	1.718	56.69
9	40	1.838	73.52
10	47	1.967	92.449
11	54	2.104	113.616
12	61	2.252	137.372
13	68	2.409	163.812
14	75	2.578	193.35
15	82	2.759	226.238
16	89	2.952	262.728
17	96	3.158	303.168
18	103	3.379	348.037
19	103	3.616	372.448
Salvage	4	3.616	14.46
Total	-		2411.848

FV of cash flows is 2,411,848,000