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Final Project: PowerCo Determine whether PowerCo should construct a new generator to meet an expected rise in demand for power. You will arrive at your conclusions by analyzing the data below and answering a series of inter? related questions. You will present your findings and recommendations in a report, the details of which are listed below in the section “PowerCo: Your Analysis and Report. ” PowerCo: The Data Consider the following situation facing a medium sized corporation: PowerCo, a medium sized power company generates and sells electricity throughout several states in the southeast U.
S. They have been in business for over 30 years and are the largest power generator in the region. They believe that a significant increase in the demand for electricity over the next 10 – 12 years will cause them to be unable to meet the expected demand with their current generation capabilities. PowerCo’s senior management believes that they must build a new generator to meet this increased demand and their Treasury department was tasked with developing the financial projections for building a new generator.
Taking the expected revenues from the new facility, developed by the firm’s economists and the expected costs of building the new plant from the firm’s engineers, they have developed financial projections to allow them to analyze the prospective investment in a new generating facility. It is expected that building the new generator will take approximately two years and will remain functional for at least 10 years.
While Treasury expects that the facility will continue to generate electricity for longer than 10 years, they believe that financial projections for a period longer than 10 years are too uncertain and so have limited their estimates to 10 years of use. The financial projections, given on an annual basis in after tax dollars, are as follows (assume all cash flows occur at the end of the year): 1. The expected cash costs, in millions of dollars, of building the facility: Year Expected costs 1 25 2 28 2.
The expected profits from the sale of electricity , in millions of dollars: Year Expected after tax profits 3 6 4 7 5 8 6 9 7 9 8 9 9 9 10 9 11 9 12 9 3. The firm believes that its opportunity cost of capital is 8% and so will use that rate to evaluate the project. INSTRUCTIONS FOR ASSIGNMENT: PowerCo: Your Analysis and Report Answer questions 1? 5, listed below analyzing the data presented in the previous section.
After answering the five questions, you will need to assemble your answers to form your final project, which should be presented in the following way: Introduction to your analysis (briefly state your purpose). The main body of your analysis (i. e. your answers to questions 1? 4, below). Recommendations (your answer to the last question below). There is no particular style of presentation that you are required to follow, but which ever one you use, you must be consistent. PowerCo Analysis Questions Your answers to the following questions will form the main body of your case analysis. . What is the present value of the expected costs? Show all calculations. 2. What is the present value of the expected after? tax cash profits? Show all calculations. 3. What is the expected net present value (the difference between the PVs of the inflows and outflows)? Show the calculations. What does this number represent? Be detailed in your responses. 4. What are the risks inherent in deciding to build the facility? How would each of the risks affect the decision to build the facility? Be specific. 5. Should PowerCo build the plant? Why or why not?