Evaluate the five alternative production projects using
traditional discounted cash flow analysis:
a)Â Â Â What is the appropriate cost of capital for this case?Â Support your reasoning.
Note that the marginal cost of capital is the appropriate input for capital budgeting decisions. This rate should best estimate of the current cost of raising additional debt of similar risk. (The historical average of 5.5% is not correct.)
b)Â Â Â Fill in the following operating characteristics of each of the production alternatives?
I have completed the first one for you â€“ Natural Gas.
Plant TypeÂ Â Â Useful Life (Years)Â Â Â Cost (In Millions $)Â Â Â Expected Annual Cash Flows (In Millions $)
Natural GasÂ Â Â 20Â Â Â 650 Â Â Â 85
NuclearÂ Â Â Â Â Â Â Â Â
WindÂ Â Â Â Â Â Â Â Â
SolarÂ Â Â Â Â Â Â Â Â
CoalÂ Â Â Â Â Â Â Â Â
c)Â Â Â Calculate the net present value (NPV) and internal rate of return (IRR) for each of the alternatives: natural gas plant, nuclear plant, wind plant, solar plant and coal plant.
Use the excel template I posted to complete this.
Â I have completed the first one for you â€“ Natural Gas. Be sure, however, to enter the cost of capital you determined in part a as the WACC (weighted average cost of capital). This will change the NPV for Natural Gas.
Like that of the last case, you may use this discussion forum to openly discuss any questions, answers, etcetera about where the numbers come from and how items are calculated. It is here for you to help each other,
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