The plant engineer of a major food processing corporation is evaluating alternatives to supply electricity to the plant. He will pay RM3 million for electricity purchased from the local utility at the end of this first year and estimates that this cost will increase at RM300 000 per year. He desires to know if he should build a 4 000 kilowatt power plant. His operating costs (other than fuel) for such a power plant are estimated to be RM130 000 per year. He is considering two alternative fuels: (a) WOOD: Installed cost of the power plant is RM1 200/kilowatt. Fuel consumption is 30 000 tone per year. Fuel cost for the first year is RM20 per ton and is estimated to increase at a rate of RM2 per ton for each year after the first. No salvage value. (b) OIL: Installed cost is $1000/kw. Fuel consumption is 46 000 barrels per year. Fuel cost is RM34 per barrel for the first year and is estimated to increase at RM1/barrel per year for each year after the first. No salvage value. If interest is 12%, and the analysis period is 10 years, which alternative should the engineer choose? Calculate PW based on (i) Do nothing (ii) Wood (iii) Oil

The plant engineer of a major food processing corporation is evaluating alternatives to supply electricity to the plant. He will pay RM3 million for electricity purchased from the local utility at the end of this first year and estimates that this cost will increase at RM300 000 per year. He desires to know if he should build a 4 000 kilowatt power plant. His operating costs (other than fuel) for such a power plant are estimated to be RM130 000 per year. He is considering two alternative fuels: (a) WOOD: Installed cost of the power plant is RM1 200/kilowatt. Fuel consumption is 30 000 tone per year. Fuel cost for the first year is RM20 per ton and is estimated to increase at a rate of RM2 per ton for each year after the first. No salvage value. (b) OIL: Installed cost is $1000/kw. Fuel consumption is 46 000 barrels per year. Fuel cost is RM34 per barrel for the first year and is estimated to increase at RM1/barrel per year for each year after the first. No salvage value. If interest is 12%, and the analysis period is 10 years, which alternative should the engineer choose? Calculate PW based on (i) Do nothing (ii) Wood (iii) Oil

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1iM

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