A city government feels that energy production capacity must be expanded to meet anticipated demands for...

A city government feels that energy production capacity must be expanded to meet anticipated demands for energy. Three alternatives sources are being considered.

a. A nuclear facility with an investment of $250 million, operating costs of $3 million per year and life of 20 years.

b. A coal plant with an investment of $200 million, operating costs of 10 million per year and a life of 20 years.

c. A natural gas plant with a cost of $100 million, operating costs of $18 million per year and a life of 20 years. Use the ROR method to select the best alternative. The cost of capital (MARR) for the city is 9%.

by using rate of returns

i need solution thanks

Expert Solution

MARR = 9%

We need to calculate incremental IRR. In order to calculate incremental IRR, first, we arrange the options in the increasing value of their initial cost

We need to find incremental cash flow between lowest and second lowest option first, then use the formula of IRR in excel on the incremental cash flow, if incremental IRR is greater than MARR then select the second lowest option if it is less than the MARR then select the lowest option.

Keep repeating the above until the last option is evaluated

	Power Plant			Incremental IRR Analysis
Year	GAS (G)	COAL (C)	NUCLEAR (N)	C-G	N-G
0	-100000000	-200000000	-250000000	-100000000	-150000000
1	-18000000	-10000000	-3000000	8000000	15000000
2	-18000000	-10000000	-3000000	8000000	15000000
3	-18000000	-10000000	-3000000	8000000	15000000
4	-18000000	-10000000	-3000000	8000000	15000000
5	-18000000	-10000000	-3000000	8000000	15000000
6	-18000000	-10000000	-3000000	8000000	15000000
7	-18000000	-10000000	-3000000	8000000	15000000
8	-18000000	-10000000	-3000000	8000000	15000000
9	-18000000	-10000000	-3000000	8000000	15000000
10	-18000000	-10000000	-3000000	8000000	15000000
11	-18000000	-10000000	-3000000	8000000	15000000
12	-18000000	-10000000	-3000000	8000000	15000000
13	-18000000	-10000000	-3000000	8000000	15000000
14	-18000000	-10000000	-3000000	8000000	15000000
15	-18000000	-10000000	-3000000	8000000	15000000
16	-18000000	-10000000	-3000000	8000000	15000000
17	-18000000	-10000000	-3000000	8000000	15000000
18	-18000000	-10000000	-3000000	8000000	15000000
19	-18000000	-10000000	-3000000	8000000	15000000
20	-18000000	-10000000	-3000000	8000000	15000000
Incremental IRR				4.96%	7.75%

We compare first Gas and Coal, since Gas has the lowest cost, and the second lowest option is Coal, incremental IRR is less than MARR so we select Gas, and reject Coal

Now we find incremental cash flow between Nuclear & Gas, we find incremental IRR<MARR, so we select Gas again and reject Nuclear option

Gas power plant should be selected as per the incremental analysis

Rahul Sunny answered 2 years ago

Liquid biofuels are a way to meet transportation demands as we shift our transportation energy paradigm....

Liquid biofuels are a way to meet transportation demands as we shift our transportation energy paradigm. Briefly talk about artificial photosynthesis research and engineering yeast. How could these improve biofuel production?

During the next four quarters, Dorian Auto must meet (on time) the following demands for cars:...

During the next four quarters, Dorian Auto must meet (on time) the following demands for cars: 4000 in quarter 1; 2000 in quarter 2; 5000 in quarter 3; 1000 in quarter 4. At the beginning of quarter 1, there are 300 cars in stock. The company has the capacity to produce at the most 3000 cars per quarter. At the beginning of each quarter, the company can increase (but not decrease) its production capacity. It costs $100 to increase production...

During the next four quarters Dorian Auto must meet (on time) the following demands for cars:...

During the next four quarters Dorian Auto must meet (on time) the following demands for cars: 4000 in quarter 1; 2000 in quarter 2; 5000 in quarter 3; 1000 in quarter 4. At the beginning of quarter 1, there are 300 cars in stock. The company has the capacity to produce at the most 3000 cars per quarter. At the beginning of each quarter, the company can increase (but not decrease) its production capacity. It costs $100 to increase production...

Capacity planning are strategic decisions, because: Impact organizations ability to meet future demands Affect operating costs...

Capacity planning are strategic decisions, because: Impact organizations ability to meet future demands Affect operating costs Do not involve long-term commitment of resources Cannot affect competitiveness Alternatives a) and b) are both correct True/False: Control charts are the difference between the actual value and the value predicted

A manager needs to hire short-term employees to meet production demands. The manager would like to...

A manager needs to hire short-term employees to meet production demands. The manager would like to hire one of three possible short-term workers. Ten hours are demanded with 50% probability, 20 hours are demanded with 30% probability, and 30 hours are demanded with 20% probability. The table below represents the alternatives and possible states of nature. States of Nature (Worker hours demanded) Alternatives 10 hr total pay 20 hr total pay 30 hr total pay Worker 1 $1,000 $1,800 $2,400...

A company must meet (on time) the following demands quarter 1|30 units; quarter 2|20 units; quarter...

A company must meet (on time) the following demands quarter 1|30 units; quarter 2|20 units; quarter 3|40 units. Each quarter, up to 27 units can be produced with regular-time labor, at a cost of $40 per unit. During each quarter, an unlimited number of units can be produced with overtime labor, at a cost of $60 per unit. Of all units produced, 25% are unsuitable and cannot be used to meet demand. Also, at the end of each quarter, 10%...

Duo Co needs to increase production capacity to meet increasing demand for an existing product, ‘Quago’,...

Duo Co needs to increase production capacity to meet increasing demand for an existing product, ‘Quago’, which is used in food processing. A new machine, with a useful life of four years and a maximum output of 600,000 kg of Quago per year, could be bought for $800,000, payable immediately. The scrap value of the machine after four years would be $30,000. Forecast demand and production of Quago over the next four years is as follows: Year 1 2 3...

The City of Gurnee is preparing its Government-Wide financial statements for the year. Its accountant must...

The City of Gurnee is preparing its Government-Wide financial statements for the year. Its accountant must prepare a number of journal entries to recognize assets and liabilities previously omitted from the Fund financial statements and to recognize revenues and expenses for the year under accrual accounting that were not recognized under the current financial resources measurement focus and the modified accrual basis of accounting used to prepare the Statement of Revenues, Expenditures, and Changes in Fund Balances for its Funds....

The production of economically desirable public goods must be sponsored by government because: the law of...

The production of economically desirable public goods must be sponsored by government because: the law of increasing marginal opportunity costs does not apply to public goods. the existence of large external costs precludes their production in the private sector. the benefits derived from their production exceed the costs of producing them. public goods have characteristics which make it difficult or impossible for private firms to produce them profitably.

Tiong Nam Tonic (TNT) needs to expand its production capacity. To do so, the company must...

Tiong Nam Tonic (TNT) needs to expand its production capacity. To do so, the company must acquire a machine costing $120,000. The machine can be leased or purchased. The terms of the lease and purchase plans are as follows:- Lease: The leasing arrangement requires beginning-of-year payments of $40,000 over 4 years. Under the leasing arrangement, the lessee is required to insure the machine during the contract period. TNT insurance broker has informed that the annual insurance premium is about $1,200,...

Question