A city has identified two options for developing solar power capacity. The investment basis for comparison...

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A city has identified two options for developing solar powercapacity. The investment basis for comparison is 8 years, withinterest fixed at 12% per year.
Option A is to build a photovoltaic array at 50% capacity now,at a cost of $1 million, with an operating cost of $200,000 at theend of each year for 4 years. At the end of year 4, the array willbe expanded to 100% capacity, at a cost of $900,000. After theexpansion, operating costs will become $350,000 per year.
Option B is to build a full-scale solar thermal electricgeneration plant now at a cost of $1.5 million, with end-of-yearoperating costs of $250,000.
Which option should be chosen?

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3.8 Ratings (570 Votes)

To decide the option we need to calculate the Present Value PV of all costs for each option Option A Operating cost 1st 4 years 200000 PV of Opcost PMT 200000 N 4 See Answer

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A city has identified two options for developing solar powercapacity. The investment basis for comparison is 8 years, withinterest fixed at 12% per year.Option A is to build a photovoltaic array at 50% capacity now,at a cost of $1 million, with an operating cost of $200,000 at theend of each year for 4 years. At the end of year 4, the array willbe expanded to 100% capacity, at a cost of $900,000. After theexpansion, operating costs will become $350,000 per year.Option B is to build a full-scale solar thermal electricgeneration plant now at a cost of $1.5 million, with end-of-yearoperating costs of $250,000.Which option should be chosen?