To go with Darden Case UVA-QA-0726, c-Energy’s Red Hill Plant: Meeting the SO2 Challenge
Richard Wall’s calculations of the economic impacts of the three options are on page 4 of the case. As you realize, his numbers are incomplete. This assignment will require you to use your spreadsheet modeling skills and Crystal Ball to analyze the options more fully. Here are the questions for you to answer:
1. (25 points) Jenny Becker is interested in what you can tell her about the three options (no scrubber, dry scrubber, and wet scrubber). In particular, she notes that the value (NPV of the cost) of each one is uncertain for a variety of reasons. First, future allowance prices are unknown, and these should have the same impact on each option. For the wet scrubber, there is uncertainty about the installation time, and there appears to be some uncertainty about the amount of SO2 reduction – it appears to fall between 95% and 99%, with a most likely value at 98%. For the dry scrubber, there is uncertainty about the percent reduction; the data in Exhibit 3 suggests that there is quite a bit of variability, even if you know the sulfur level, the heat value, and the moisture content. Finally, there is the question of how often the dry scrubber would actually be on. The more it would be turned off, the more Red Hill would save. Becker points out that this is clearly a decision that Red Hill gets to make, but she understands that for the purpose of modeling, you have to have a rule about when to turn the scrubber on and off. For now, a threshold value of $600 per allowance makes sense.
Based on a Crystal Ball analysis, explain the performance of the three options, highlighting the differences. Be sure to consider both the NPV of the total cost over 15 years and the aggregate SO2 reduction over that time. Any insights you can provide to
Jenny Becker would be welcome. For example, what is the likelihood that the dry scrubber would