You are required to submit at the end of the semester a final project in which you will determine whether PowerCo should construct a new generator to meet an expected rise in demand for power. You will arrive at your conclusions by analyzing the data below and answering a series of interrelated questions. You will present your findings and recommenddations in a report, the details of which are listed below in the section “PowerCo: Your Analysis and Report.”
PowerCo: The Data
Consider the following situation:
PowerCo, a medium‐sized power company, generates and sells electricity throughout several states in the southeast United States. They have been in business for more than 30 years and are the largest power generator in the region. They believe that a significant increase in the demand for electricity over the next 10–12 years will cause them to be unable to meet the expected demand with their current
PowerCo’s senior management believes that they must build a new generator to meet this increased demand and their Treasury
department was tasked with developing the financial projections for building a new generator. Taking the expected revenues from the new facility, developed by the firm’s economists and the expected costs of building the new plant from the firm’s engineers, they have developed financial projections to allow them to analyze the prospective investment in a new generating facility.
It is expected that building the new generator will take approximately 2 years and will remain functional for at least 10 years. While Treasury expects that the facility will continue to generate electricity for longer than 10 years, they believe that financial projections for a period longer than 10 years are too uncertain and so have limited their estimates to 10 years of use.
The financial projections, given on an annual basis in after‐tax dollars, are as follows (assume all cash flows occur at the end of the...