Finance Final Project

Michael Mirek Principals of Finance Final Project Power Co., is looking to install a new generator for their power company because the demand is so high. The company plans to be completed with the project in 10 years, and will last for 10 years, or possibly longer. The companies cost of capital is 8%, and I will look to determine if this project is worth embarking on. To determine this I will answer these 4 questions. 1. What is the present value of the expected costs? 2. What is the present value of the expected after-tax cash profits? 3. What is the expected net present value (the difference between the PVs of the inflows and outflows)? What does this number represent? 4. What are the risks inherent in deciding to build the facility? How would each of the risks affect the decision to build the facility? 5. Should PowerCo build the plant? Why or why not? 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 building the facility: Year & Expected Costs: 1 = 25; 2 =28: (2) The expected profits from the sale of electricity, in millions of dollars: Year & Expected after-tax profits: 3= 6: 4=7: 5= 8: 6= 9: 7= 9: 8= 9: 9= 9: 10= 9: 11= 9: 12= 9. (3)The firm believes that its opportunity cost of capital is 8 percent and so will use that rate to evaluate the project.
What is the present value of the expected costs
PV of costs

Year
Cost
D.F
PV
1
25
0.93
23.25
2
28
0.86
24.08

47.33 Million

In D.F section, year 1 number was calculated by 1/1+Cost of capital(.08), and year 2 was calculated by 1/1.08^2, while the PV section numbers were calculated by multiplying cost by the numbers in the D.F section(25x.93=23.25, .86x24.08=24.08) then added together to get a total PV of 47.33 million. PV after-tax

year cost D.F
PV
3
6
0.79
4.76
4
7
0.73
5.15
5
8
0.68
5.44
6
9
0.63