constructioll WI and building modifications wi chased for $230,000 (with a 10% r

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constructioll WI and building modifications wi chased for $230,000 (with a 10% rd), with a its y val 2 that it would decommission ue of the initial investment required for the plant? 6. Yankee Atomic Electric Co.announced Rowe nuclear plant at a n estimated cost of $247 million. The cost includes: when dismantling will begin. These $32 million to maintain the plant expenses will accrue at the rate of $4 million a year. b)S56.5 million for the cost ofbuild nga facility to storeitsspent fuel until it is shipped in 2000 to a permanent repository. This storage facility will be depreciated straight-line over its eight-year estimated life. c. $158.5 million for thecost of dismantling the plant in 2000 and disposing of its nuclear wastes. At the same time, Yankee Atomic estimated that decommissioning the plant in 1992, eight years earlier than its planned retirement in 2000, will save it $116 million ($14.5 million a year) before tax by enabling the utility to purchase cheaper electricity than Yankee Rowe could provide. In addition, Yankee Atomic said it had accumulated $72 million in a decom- missioning fund required by the Nuclear Regulatory Commission. a. What is the present value of Yankee's $247 million decommissioning cost? Assume a cost of capital equal to (12%)and a 34%tax rate. b. Taking into account the savings on the purchase of cheaper electricity, and the $72 mil- lion already set aside, how much additional money does Yankee Atomic have to set aside in 1992 to have enough money to pay for the decommissioning e c. What other factors might you consider in calculating the cost of decom

Explanation / Answer

PRESENT VALUE OF v$247 million decommissioning cost $4 million a year for 8 years to maintain the plant $32 million Building facilities for storage $56.50 million Dismantling and disposing off neuclear waste $158.50 million $247 million Depreciation per year for building facilities $7.06 million (56.5/8) Depreciation tax shield $2.40 million (7.06*0.34) Present Value(PV) of cash flow=(Cash flow)/(1+i)^N) i=discount rate=cost of capital=12%=0.12 N=Year of cash flow Year wise cash flows are given below:($ million) N A B C D E=A+B+C+D F=E/(1.12^N) Year Building Maintain Dismantling Depreciation Net cost PV of Facilities Plant &disposal tax shield Net Cost 1992 0 $56.50 $0 $0 $0 $56.50 56.5 1993 1 $0 $4 $0 ($2.40) $1.60 1.42857143 1994 2 $0 $4 $0 ($2.40) $1.60 1.2755102 1995 3 $0 $4 $0 ($2.40) $1.60 1.1388484 1996 4 $0 $4 $0 ($2.40) $1.60 1.01682893 1997 5 $0 $4 $0 ($2.40) $1.60 0.90788297 1998 6 $0 $4 $0 ($2.40) $1.60 0.81060979 1999 7 $0 $4 $0 ($2.40) $1.60 0.72375874 2000 8 $0 $4 $158.50 ($2.40) $160.10 64.6617048 TOTAL 128.463715 PRESENT VALUE OF COST 128.463715 million dollar PRESENT VALUE OF COST(dollar) $        128,463,715 b Present value of Before tax saving of $14.5 million a year for 8 years Before tax saving $72.03 million (Using excel PV function with Rate=12%, Nper=8, Pmt=14.5 After tax saving(72,03*(1-0.34) $                     47.54 million Amount accumulated in decomposition fund $72 million Total present value $                   119.54 million Additional amount required $                       8.92 million (128.463715-119.54) Additional amount required(Dollae) $             8,923,403 c Other factors to be considered : Inflation Change in cost of capital during the eight years

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