Question

I really need help with number 5

1. Suppose MSU has an opportunity to build a solar facility just outside of Ann Arbor that would generate about 120,000 MWh per year (1 MWh = 1000 KWh), and cost $25 million to install.

To determine if this is a good deal for the university, you need to analyze the economics. Assume the market price for electricity over the next five years is $48 per MWh and there is a 5-year project horizon. Evaluate this decision using a 3% discount rate. For this problem, assume that the costs of installing the solar panels occur at time 0 (beginning of year 1), and the benefits occur at the end of each subsequent year (end of year 1, end of year 2, etc.). The 5 year horizon implies that you only need to evaluate the gains of the solar project over a 5 year period. Solar panels obviously will provide benefits in the future if they remain installed, but you should ignore years beyond the 5^th year for this analysis.

The present value of the stream of costs is $ _______ million and the present value of the stream of benefits is $ ________ million.  
answer:

25; 26.4

2. Use the data for the last question as you consider this question. Suppose Michigan State University sells the resulting renewable energy credits from this project on the market at the current price of renewable energy credits in Ohio of $5 per MWh. How much would Michigan State make each year selling renewable energy credits (RECs), and is this a benefit or a cost to the University?
answer:

$600,000; benefit

3. Should Michigan State sell the renewable energy credits? Discuss the pros and cons of selling renewable energy credits when there is no regulatory obligation to produce renewable energy.

answer:
pros: consumers can purchase easier resulting in a greater return on investments
cons: it is a higher risk without regulation

4. If the social cost of carbon is $25 per MWh, what are the annual social benefits provided by MSU if MSU undertakes this project?
answer:

$3,000,000

5. Should Michigan State use a 3% or a 7% interest rate when considering a solar project like this?

All of the questions are linked together. It is set over a 5 year project as seen in question 1.

Answer 1

1. Cost of installation is 25Million$.

Calculating net cash flow:

1				Year 1	Year 2	Year 3	Year 4	Year 5		Total
				1.03	1.0609	1.092727	1.12550881	1.159274074
A	Market price per MWh (in $)	48.00
B	Number of MWh produced per year	120,000.00
C	Total revenue per year (A*B)	5,760,000.00		5,592,233.01	5,429,352.44	5,271,215.96	5,117,685.40	4,968,626.60		26,379,113

26379113$ once rounded off to the nearest million, becomes $26.4 million.

2. Total profit through sale of credits = $5 per MWh of credit* 120,000 MWh of energy per year = a benefit of $600,000.

3. pros: consumers can purchase easier resulting in a greater return on investments
cons: it is a higher risk without regulation

4. Annual social benefits = $25 per MWh social cost of carbon* 120,000 MWh produced during the year = $3,000,000.

5. A 7% rate would lead to cash flow of $23.6 Million, which will lead to a loss.