A city has identified two options for developing solar power capacity. The investment basis for comparison is 8 years, with interest fixed at 12% per year. Option A is to build a photovoltaic array at 50% capacity now, at a cost of $1 million, with an operating cost of $200,000 at the end of each year for 4 years. At the end of year 4, the array will be expanded to 100% capacity, at a cost of $900,000. After the expansion, operating costs will become $350,000 per year. Option B is to build a full-scale solar thermal electric generation plant now at a cost of $1.5 million, with end-of-year operating costs of $250,000. Which option should be chosen?
[College: Project Cost-Benefit Analysis Course, Economic Questions] - Can someone please explain the steps on how to complete these problems? Thank you in advance!
Problem 1
A manufacturer wishes to make and sell 1.1 million units per year of an aviation part for 12 years with interest fixed at 14% per year.
Option A is to build a manufacturing plant in the United States at a cost of $7 million, with end-of-year expenses of $2 million per year. In order to meet environmental regulations, the manufacturer will need to invest $0.5 million for pollution control at the end of the fifth year.
Option B is to build a manufacturing plant in Mexico for $4 million, with annual end-of-year expenses of $1.2 million. There will be a duty charge of 30% of the selling price in the United States.
Find the aviation part selling price in the United States, at which the two options are equal.
Problem 2
A city has identified two options for developing solar power capacity. The investment basis for comparison is 8 years, with interest fixed at 12% per year.
Option A is to build a photovoltaic array at 50% capacity now, at a cost of $1 million, with an operating cost of $200,000 at the end of each year for 4 years. At the end of year 4, the array will be expanded to 100% capacity, at a cost of $900,000. After the expansion, operating costs will become $350,000 per year.
Option B is to build a full-scale solar thermal electric generation plant now at a cost of $1.5 million, with end-of-year operating costs of $250,000.
Which option should be chosen?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
