Question

NRG Energy plans to construct a giant solar plant in Santa Teresa, NM to supply electricity to 30,000 southern NM and west TX homes. The plant will have 390,000 heliostats to concentrate sunlight onto 32 water towers to generate steam. NRG will spend $560 million in constructing the plant and $430,000 per year in operating it. If a salvage value of 20% of the initial cost is assumed, how much will the company have to make each year (i.e., AW) for 15 years in order to recover its imvestment at a MARR of 10% per year? $93.65 million per year $108.83 million per year $78.87 million per year $70.53 million per year

Answer 1

To recover the investment, the present value of cash inflows should equal the present value of investment.

Present value of investment = cost of plant + present value of operating cost - present value of salvage value.

Present value of operating cost is calculated using PV function in Excel :

rate = 10%

nper = 15

pmt = -430000 (entered with a negative sign as it is a cash outflow)

Present value of operating cost = $3,270,614.

A15 fc =PV(10%,15,-430000) C D B 15 $3,270,614

Present value of salvage value = salvage value / (1 + MARR)^{number of years}

Present value of salvage value = $560 million * 20% / (1 + 10%)¹⁵

Present value of salvage value = $26,811,910.

Present value of investment = $560,000,000 + $3,270,614 - $26,811,910

Present value of investment = $536,458,705.

To recover the investment, the present value of cash inflows should equal the present value of investment.

The annual cash inflow is calculated using PMT function in Excel :

rate = 10%

nper = 15

pv = -536458705 (required present value of cash inflows)

PMT is calculated to be $70,530,252

А18 • o fe=PMT(10%,15,-536458705) с в 18 $70,530,252 |

The answer is $70.53 million