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 inter‐related questions. You will present your findings and recommendations 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 facing a medium sized corporation: PowerCo, a medium sized power company generates and sells electricity throughout several states in the southeast U.S. They have been in business for over 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 generation capabilities. 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 two 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 year):
1. The expected cash costs, in millions of dollars, of...