a final project in which you will determine whether PowerCo shouldconstruct a ne

Question

a final project in which you will determine whether PowerCo shouldconstruct a new generator to meet an expected rise in demand forpower. You will arrive at your conclusions by analyzing the databelow and answering a series of inter-related questions. You willpresent your findings and recommendations in a report, the detailsof which are listed below in the section “PowerCo: YourAnalysis and Report.”

PowerCo: The Data

Consider the following situation facing a medium sizedcorporation:
PowerCo, a medium sized power company generates and sellselectricity throughout several states in the southeast U.S. Theyhave been in business for over 30 years and are the largest powergenerator in the region. They believe that a significant increasein the demand for electricity over the next 10 – 12 yearswill cause them to be unable to meet the expected demand with theircurrent generation capabilities.
PowerCo’s senior management believes that they must build anew generator to meet this increased demand and their Treasurydepartment was tasked with developing the financial projections forbuilding a new generator. Taking the expected revenues from the newfacility, developed by the firm’s economists and the expectedcosts of building the new plant from the firm’s engineers,they have developed financial projections to allow them to analyzethe prospective investment in a new generating facility.
It is expected that building the new generator will takeapproximately two years and will remain functional for at least 10years. While Treasury expects that the facility will continue togenerate electricity for longer than 10 years, they believe thatfinancial projections for a period longer than 10 years are toouncertain and so have limited their estimates to 10 years ofuse.

The financial projections, given on an annual basis in after taxdollars, are as follows (assume all cash flows occur at the end ofthe year):
1. The expected cash costs, in millions ofdollars, of building the facility:
Year          Expected costs
1                    25
2                    28

2. The expected profits from the sale ofelectricity , 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 ofcapital is 8% and so will use that rate to evaluate theproject.

PowerCo: Your Analysis and Report
Answer questions 1-5, listed below analyzing the data presented inthe previous section. After answering the five questions, you willneed to assemble your answers to form your final project, whichshould be presented in the following way:
?Title page with your name, date, course code, and name of yourmentor.
?Introduction to your analysis (briefly state your purpose).
?The main body of your analysis (i.e. your answers to questions1-4, below).
?Recommendations (your answer to the last question below).

There is no particular style of presentation that you are requiredto follow, but which ever one you use, you must be consistent.
When you are ready to send your final project to your mentor, go tothe “Assignments” area of the course website and usethe submit function provided for the “FinalProject.”

PowerCo Analysis Questions
Your answers to the following questions will form the main body ofyour case analysis.
1. What is the present value of the expected costs? Show allcalculations.
2. What is the present value of the expected after-tax cashprofits? Show all calculations.
3. What is the expected net present value (the difference betweenthe PVs of the inflows and outflows)? Show the calculations. Whatdoes this number represent? Be detailed in your responses.
4. What are the risks inherent in deciding to build the facility?How would each of the risks affect the decision to build thefacility? Be specific.
5.Should PowerCo build the plant? Why or why not?

Explanation / Answer

3 6 0.86 5.14 4 7 0.79 5.56 5 8 0.74 5.88 6 9 0.68 6.13 7 9 0.63 5.67 8 9 0.58 5.25 9 9 0.54 4.86 10 9 0.5 4.50 11 9 0.46 4.17 12 9 0.43 3.86 Total 51.02 Total present value of the expected after-tax profits is 51.02millions End ofYear Cash Flows Present Valuefactors PresentValue 1 -25 1 -25.00 2 -28 0.93 -25.93 3 6 0.86 5.14 4 7 0.79 5.56 5 8 0.74 5.88 6 9 0.68 6.13 7 9 0.63 5.67 8 9 0.58 5.25 9 9 0.54 4.86 10 9 0.5 4.50 11 9 0.46 4.17 12 9 0.43 3.86 Total 0.10 Net Present Value is 0.1 million NPV is an indicator of how much value an investment or project addsto the firm. This show that the project will add 0.1 million ofvalue to the company. The risk that the firm will face is how many probability of theirexpected will be true. Will the demand of electricity increaseenough to cover their cost? Will the surrounding economics affecttheir profit? Will the machine work with their expectations? For PowerCo. if their ensure to the future demand will increase,they should built to meet the demand. Moreover, if the facilitywork more than 10 years, the value added to the firm will alsoincrease.

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