Principles of Finance
The purpose of the following analysis is to determine whether PowerCo, a medium sized power company in the southeast United States should build a new generator. It is the belief of PowerCo that demand for electricity will significantly increase over the next 10-12 years. In order to meet this demand, the investment in a new generator needs to be reviewed. PowerCo’s Treasury department has prepared financial projections to facilitate the analysis of the investment. This information will be used for the analysis in order to provide a recommendation of whether PowerCo should build or not build the new generator.
The Present Value of the expected costs is $47.146 million dollars. Calculations are listed below: Year
Cost x PVIF (I, N)
= Present Value
The Present Value of the expected after-tax cash profits are $47.235 million dollars. Calculations are listed below: Year
Cash Inflow x Interest Factor = Present Value
The expected Net Present Value of the investment is $89,000. This number, a positive Net Present Value, represents that the future cash inflows at the company’s cost of capital (8%) will cover the cost of the investment. This also increases the value of the company. Should the Net Present Value have been a negative amount, it would represent that the future cash inflows would not cover the cost of the investment. Calculations are listed below: NPV = PVI – PVO
NPV = 47.235-47.146
NPV = .089
There are risks to take in consideration when reviewing this information. Although the Treasury department has provided financial projections...
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