An integrated, combined cycle power plant produces 295 MW of electricity by gasi
ID: 2645022 • Letter: A
Question
An integrated, combined cycle power plant produces 295 MW of electricity by gasifying coal The capital investment for the plant is $530 million, spread evenly over two years The operating life of the plant is expected to be 19 years Additionally. the plant will operate at full capacity 73% of the time (downtime is 27% of any given year). a. If this plant will make a profit of three cents per kilowatt-hour of electricity sold to the power grid, what is the simple payback period of the plant? Is it a low-risk venture? b. What is the IRR for the plant? Is it profitable?Explanation / Answer
a. Profit per kw hour = 0.03
Total capacity = 295 MW. Operating capacity = 73%
So output = 73% of 295 = 215.35 MW or 215,350 kw
Now, kilowatt hour for 1 year = kw of 1 year* hour of 1 year
A year has 365 days. so hour = 365*24 = 8,760 hours
So kilowatt hour = 215,350 kw*8,760 hours
Total profit = profit per kw hour * kilowatt hour
= 0.03*215,350*8,760
= 56.6 million per year
Calculation of simple payback is given below:
From the table above, we can see that the plant gets postive cash flow on a cumulative basis in 10th year. So between 9th and 10th year, payback is achieved.
The plant seems to be a low risk venture as the payback is in the 10th year, out of total life of 19 years.
b. IRR:
This involves a trial and error approach
Creating a formula based scenario in excel, and using various discount rates to make PV of outflow = PV of inflow, we get the rate as 0.1060 or 10.6%. This is the IRR.
It will be profitable if IRR>hurdle rate or cost of capital. Here cost of capital is not given
Year Cash Outflow Cash inflow Cumulative cash flow at the end of year 1 -265.0 56.6 -208.4 2 -265.0 56.6 -416.8 3 56.6 -360.2 4 56.6 -303.6 5 56.6 -247.0 6 56.6 -190.4 7 56.6 -133.8 8 56.6 -77.2 9 56.6 -20.6 10 56.6 36.0 11 56.6 92.6 12 56.6 149.2 13 56.6 205.8 14 56.6 262.4 15 56.6 319.0 16 56.6 375.6 17 56.6 432.2 18 56.6 488.8 19 56.6 545.4Related Questions
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