Question

4.5 If the total capital cost of the Section 4.6 plant design is $600,000,000 and the annual administrative and maintenance costs are one cent per kW-hr, what is the minimum cost of electricity per kW-hr, assuming an annual interest rate of 9% and an expected plant lifetime of thirty-five years?

4.24 Upon hiring on with Hot Stuff Engineering Company after graduation, you purchase a $30,000 automobile to establish an image as a prosperous engineer. You pay no money down, but 1% interest per month, compounded monthly, for four years. What are your monthly payments? What will your payments be if you are paying simple interest?

Answer 1

4.5  
The question has very limited information. The question really asks is- cost of admin and maintenance is 1% of the electricity sales. The interest payment is 9% of the total capital cost of $600 Mn. The selling price of the electricity should at least cover the interest charge. Hence, the cash flows are -  
  
Electricity sales   100%
Admin & maintenance costs   1%
EBIDTA   99%
Interest charge  
=9%*600,000,000   54000000
  
99% of sales margin should at least cover interest charge. Hence, the sales should be at least- 54,000,000/99%=$54,545,455  
Unit price of electricity per kWh=   5,4545,454/Total production of electricity from the plant
  

  

4.24  
Loan amount=    $30,000
Loan period=   4 years= 48 months
Interest rate=   1% per month

There are 2 ways of looking at the loan. One is pay only interest per month during the 4 years of term of the loan and repay the lump sum of $30,000 at the end of 4 years. This is a very unusual situation. The interest rate calculation method- monthly compounding or simple interest will not make any difference to amount paid monthly since no interest is paid. the interest only payment is calculated as below. Please note that the loan principal is 100% outstanding at the end of the 4 year period. Hence, is marked as -30,000 in the formula  
Monthly payments   $300.00

Other way is to repay the loan through equal monthly installments over 4 year period. Monthly repayment is calculated as below for monthly compounding-  
Monthly payments   $790.02

In case of simple interest, the interest on the loan principal is-  
Simple interest per month=   300

The principal is repaid over a period of 48 months. Hence, principal repayment every month is  
Principal repayment=   625

Total monthly repayment is the sum of interest component and principal repayment  
Monthly repayment=   925