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.	Cash Flow of the project
																							(in millions)
	Particulars	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21
	Initial Investmnt	$ -90.00
	Revenues		$   12.00	$   12.00	$   12.00	$   12.00	$   12.00	$   19.00	$   26.00	$   33.00	$   40.00	$   47.00	$   54.00	$   61.00	$   68.00	$   75.00	$   82.00	$   89.00	$   96.00	$ 103.00	$ 103.00	$ 103.00	$     103.00
	Salvage Value																						$          4.00
	Net Cash Flow	$ -90.00	$   12.00	$   12.00	$   12.00	$   12.00	$   12.00	$   19.00	$   26.00	$   33.00	$   40.00	$   47.00	$   54.00	$   61.00	$   68.00	$   75.00	$   82.00	$   89.00	$   96.00	$ 103.00	$ 103.00	$ 103.00	$     107.00
Answer b.	Computation of Feasibility of project
																							(in millions)
	Particulars	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21
	Cash Flows	$ -90.00	$   12.00	$   12.00	$   12.00	$   12.00	$   12.00	$   19.00	$   26.00	$   33.00	$   40.00	$   47.00	$   54.00	$   61.00	$   68.00	$   75.00	$   82.00	$   89.00	$   96.00	$ 103.00	$ 103.00	$ 103.00	$     107.00
	Discounting Factor @7%	1.0000	0.9346	0.8734	0.8163	0.7629	0.7130	0.6663	0.6227	0.5820	0.5439	0.5083	0.4751	0.4440	0.4150	0.3878	0.3624	0.3387	0.3166	0.2959	0.2765	0.2584	0.2415
	Present Value	$ -90.00	$   11.21	$   10.48	$      9.80	$      9.15	$      8.56	$   12.66	$   16.19	$   19.21	$   21.76	$   23.89	$   25.66	$   27.08	$   28.22	$   29.09	$   29.72	$   30.15	$   30.39	$   30.47	$   28.48	$   26.62	$        25.84
	Net Present Value	$ 364.63
	Since, NPV is positive hence, the project is acceptable.