Question

A city in the Midwest has made a decision to expand the electricity production in its area by building a new power plant. The city government must decide whether the plant will be powered by coal or whether the plant will be built on a river and use hydropower. The planning horizon is 40 years, and the assumed cost of capital is 7%. Compute a conventional B/C ratio, using AW, with disbenefits in the numerator for each of the two alternatives, determine which one should be chosen, and explain why. The coal alternative would require a $50 million capital investment, a $500,000 annual operating expense, and bring about $2 million in annual operating revenue. In addition, the environmental harm and pollution impact caused by the plant is estimated to amount to $1 million annually. The plant is estimated to have a $400,000 worth of positive annual impact on the economic development of the city. The hydroelectric alternative would require a $90 million capital investment, a $200,000 annual operating expense, and bring $1.5 million in annual operating revenue. The plant is expected to have no significant negative impact on the environment. The benefits of improved flood protection, water management, as well as fishing and recreation are expected to total $6 million annually.

Solve it using XL and show the functions that has been used

Answer 1

Convential Benefit/Cost(BW) Ratio, Annual Worth(AW) Method = AW of Benefits(B) - AW of Disbenefits(D)/AW of Costs Option 1 - Plant powered by Plant Option 2 - Plant Using Hydropower Capital(Initial) Investment 50,000,000.00 90,000,000.00 Annual Operating Expense 500,000.00 200,000.00 Annual Operating Revenue 200,000.00 150,000.00 100,000.00 0.00 Disbenfits(D) Environmental harm and pollution impact Cost Benefits(B) Positive annual impact on the economic Benefits of improved flood protection etc 400,000.00 600,000.00 Cost of Captial Planning Orizon(Years) 0.07 40.00 0.07 40.00 Annual Worth(AW) of Benfits including Revenue(Revenue + Benefits Annual Worth(AW) Disbenefits (D) Annual Worth(AW) Capital Cost Annual Worth(AW) of Annual Expense Annual worth(AW) of Total Cost 600,000.00 100,000.00 3,750,456.94 500,000.00 4,250,456.94 750,000.00 0.00 6,750,822.50 200,000.00 6,950,822.50 PMT(rate, year, -pv) BC ratio 0.12 0.11