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In: Economics

The city of Carlsbad in California is considering building a $300 million water-desalination plant. The facility...

The city of Carlsbad in California is considering building a $300 million water-desalination plant. The facility would be the largest in the Western Hemisphere, producing 50 million gallons of drinking water a day – enough to supply about 100,000 homes. This plant, which uses improved membranes and pumping system to bring down the energy cost to $0.90 in electricity to produce 10,000 gallons of water. Suppose the desalination plant is fully operational and you expect to operate it continuously for 20 years, with an estimated salvage value of $20 million. The operating and maintenance costs (excluding energy cost) amount to $15 million the first year and will increase at a rate of 3% per year. If the city plans to sells the water for about $925 per acre-foot (an acre-foot is 325,851 gallons – enough water for four people per year.), can it recover the capital cost and other operating costs? Assume the city’s interest rate for this water project is known to be 6%.

Solutions

Expert Solution

Pls see table below for calculations and answer.

A B C D E F = Sum(A to E) PV = F/1.06^Time
Time Capital Cost Salvage Value Electricity cost = $0.90*50million*365/10000 Optg & Maintenance cost Revenue = $925*50M*365/325851
0 -300000000 -300000000 -300000000
1 -1642500 -15000000 51806654 35164154 33173730
2 -1642500 -15450000 51806654 34714154 30895473
3 -1642500 -15913500 51806654 34250654 28757510
4 -1642500 -16390905 51806654 33773249 26751576
5 -1642500 -16882632 51806654 33281522 24869889
6 -1642500 -17389111 51806654 32775043 23105112
7 -1642500 -17910784 51806654 32253370 21450333
8 -1642500 -18448108 51806654 31716046 19899040
9 -1642500 -19001551 51806654 31162603 18445097
10 -1642500 -19571598 51806654 30592556 17082724
11 -1642500 -20158746 51806654 30005408 15806475
12 -1642500 -20763508 51806654 29400646 14611220
13 -1642500 -21386413 51806654 28777741 13492128
14 -1642500 -22028006 51806654 28136148 12444646
15 -1642500 -22688846 51806654 27475308 11464486
16 -1642500 -23369511 51806654 26794643 10547612
17 -1642500 -24070597 51806654 26093557 9690219
18 -1642500 -24792714 51806654 25371439 8888726
19 -1642500 -25536496 51806654 24627658 8139761
20 20000000 -1642500 -26302591 51806654 43861563 13676243
Total 63191999

Rahul Sunny answered 2 years ago
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