Suppose that an electricity provider would build a power plant at the cost of $50 million....

Suppose that an electricity provider would build a power plant at the cost of $50 million. Once the plant is built, it would cost the plant $0.07 per kilowatt hour of electricity that it produces. Over its lifetime, the plant is expected to generate 100 million kilowatt hours. Suppose that the regulators believe that the investors who put up capital to build the plant should be able to recoup its investment plus a 300% return throughout the life of the plant. Calculate the price per kilowatt hour that the regulators should allow the plant operators should charge.

Expert Solution

As investors want torecoup their investment plus a 300% return on investment would mean that they want a total of $200 million to be recovered from this investment plus the plant also has to cover its electricity production costs which comes out to be $7 million for 100 million kilowatt hours(KWH) produced. Thus, the plant would have to recover atleast(with great emphasis on atleast) $207 million over the lifetime of the firm which will come out to be $2.07 per kilowatt hour to be charged from customers to recover all the costs .

the plant should charge atleast $2.07/KWH.

Rahul Sunny answered 2 years ago

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