Question

I just need explanation in an easy format for each calculation as I am uploading the Excel Work. Just complete the highlighted portion below.

Your boss believes the company's power plant is producing too much air pollution on a typical island. Your boss gives you three choices for dealing with this problem because he/she does not want to deal with it:

You can pay a pollution tax (Carbon Offsets) onetime of $13,000,000 immediately.

You can close the plant and install a power cable from the mainland to the Island. That will cost you $1,000,000 at the end of this year, $3,000,000 at the end of next year and then $750,000 forever for maintenance.

You can retrofit the plant with scrubbers to reduce the emissions to make the plant green. That will cost $7.5m at the end of this year and $100,000 for 50-years for maintenance.

Assume that the cost of generating power on the mainland is approximately the same as the cost of generating power at the Island's plant. Assume, this comes as a surprise to you and you have not saved any money in reserves, and you need to raise capital. Additional information is that market has a 12 percent market risk premium on the power plant with the risk-free rate being 5 percent with a company tax rate of 35 percent.

Current total raised capital at the power plant: (This will help you calculate the WACC)

Debt – 7,000 outstanding bonds, at 7.5% coupon and 20 years to maturity. These bonds pay interest semiannually and quoted a price of 108 percent of par.

Common Stock -180,000 shares outstanding, selling for $50 per share: Beta .90.

Preferred Stock – 8,000 shares of 5.5 percent preferred stock outstanding, currently selling for $95.00 per share.

Please answer in essay format and provide your Excel document showing all your calculation in appendixes choose the best option for Island. Support your answer with your calculations. Also, to calculations use specified resources, other appropriate scholarly resources, including older articles.Length: However long you need to answer the question (Paragraph per option is normal).

Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to University's Academic Integrity Policy.

Upload your assignment using the Upload Assignment button below.

Grading Guideline –

The introduction should state the answer and establish the topic and a clear thesis statement.

The conclusion summarizes the main points and leaves the reader with a strong comprehension of the paper’s significance and the author’s understanding of the correct financial decision.

All research is correctly credited, using correct APA format.

Grammatically correct - No spelling, grammar, or mechanics errors

Solution
Calculating Weighted Average Cost of Capital
	Shares	Value	Total Value	Weight
Common Stock	180000	50	$        9,000,000.00	51.96%
Debt	7000	108	$           756,000.00	4.36%
Preferred Stock	8000	95	$           760,000.00	4.39%
Total			$      17,320,000.00
Calculating Cost
Cost of Debt
6.76%
Cost of Preferred Stock, under the assumption that there is a PAR value of $100 is calculated by
Preferred dividend/ price of preferred stock
= 5.50/95
5.79%
Cost of equity
=5%+.90*12%
15.800%
WACC
	Weight	Cost of Capital	Tax shield	Weighted Average Cost
Common Stock	51.96%	15.80%	0	8.21%
Debt	4.36%	6.76%	35%	0.19%
Preferred Stock	4.39%	5.79%	0	0.25%
WACC				8.66%
Case I
Paying a pollution tax (Carbon Offsets) onetime of $13,000,000 immediately which has a NPV of -$13,000,000
Case II
Closing the plant and installing a power cable from the mainland to the Island.
Year	Cash Flow	Discounted Value
0	0
1	$    (1,000,000.00)	-920335.5702
2	$    (3,000,000.00)	-2541052.686
3 to ∞	$       (750,000.00)	-6754320.143
	Net Present value	-10215708.4
Case III
Retrofitting the plant with scrubbers to reduce emissions and make the plant green
					Interest
Year	Cash Flow	Discounted Cash Flow			8.66%
0	$                     -	$                           -
1	$    (7,500,000.00)	$          (6,902,516.78)
2	$       (100,000.00)	$               (84,701.76)
3	$       (100,000.00)	$               (77,954.04)
4	$       (100,000.00)	$               (71,743.88)
5	$       (100,000.00)	$               (66,028.44)
6	$       (100,000.00)	$               (60,768.32)
7	$       (100,000.00)	$               (55,927.25)
8	$       (100,000.00)	$               (51,471.84)
9	$       (100,000.00)	$               (47,371.36)
10	$       (100,000.00)	$               (43,597.55)
11	$       (100,000.00)	$               (40,124.38)
12	$       (100,000.00)	$               (36,927.89)
13	$       (100,000.00)	$               (33,986.05)
14	$       (100,000.00)	$               (31,278.57)
15	$       (100,000.00)	$               (28,786.78)
16	$       (100,000.00)	$               (26,493.50)
17	$       (100,000.00)	$               (24,382.91)
18	$       (100,000.00)	$               (22,440.46)
19	$       (100,000.00)	$               (20,652.75)
20	$       (100,000.00)	$               (19,007.46)
21	$       (100,000.00)	$               (17,493.24)
22	$       (100,000.00)	$               (16,099.65)
23	$       (100,000.00)	$               (14,817.09)
24	$       (100,000.00)	$               (13,636.69)
25	$       (100,000.00)	$               (12,550.33)
26	$       (100,000.00)	$               (11,550.52)
27	$       (100,000.00)	$               (10,630.35)
28	$       (100,000.00)	$                 (9,783.49)
29	$       (100,000.00)	$                 (9,004.09)
30	$       (100,000.00)	$                 (8,286.79)
31	$       (100,000.00)	$                 (7,626.63)
32	$       (100,000.00)	$                 (7,019.05)
33	$       (100,000.00)	$                 (6,459.89)
34	$       (100,000.00)	$                 (5,945.26)
35	$       (100,000.00)	$                 (5,471.64)
36	$       (100,000.00)	$                 (5,035.74)
37	$       (100,000.00)	$                 (4,634.57)
38	$       (100,000.00)	$                 (4,265.36)
39	$       (100,000.00)	$                 (3,925.56)
40	$       (100,000.00)	$                 (3,612.84)
41	$       (100,000.00)	$                 (3,325.02)
42	$       (100,000.00)	$                 (3,060.14)
43	$       (100,000.00)	$                 (2,816.35)
44	$       (100,000.00)	$                 (2,591.99)
45	$       (100,000.00)	$                 (2,385.50)
46	$       (100,000.00)	$                 (2,195.46)
47	$       (100,000.00)	$                 (2,020.56)
48	$       (100,000.00)	$                 (1,859.59)
49	$       (100,000.00)	$                 (1,711.45)
50	$       (100,000.00)	$                 (1,575.11)
51	$       (100,000.00)	$                 (1,449.63)
	Net Present Value	$          (7,949,001.54)
As per the above three alternatives, NPV is
Case I	$ (13,000,000.00)
Case II	$ (10,215,708.40)
Case III	$    (7,949,001.54)
The best alternative is Case III, where negative NPV is lowest

Answer 1