Given the new found interest in nuclear power plants due to potential carbon taxes, you consider...

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Given the new found interest in nuclear power plants due topotential carbon taxes, you consider starting a company to build anuclear power plant. Before you can build the plant, you need togather permits, fight lawsuits and so forth. That will cost $800million today and take 5 years to resolve with a 35% probability ofsuccess. If you build the plant, you must pay $9 billion the dayyou start building the plant, which is immediately after thelawsuits etc are resolved. The power plant itself takes 4 years tobuild. At that point the plant starts operating (exactly 4 yearsfrom when construction started). You receive $1 billion per yearfor 50 years starting one year from when the plant startsoperating. At the end of the project, you have to pay $3 billion toshut down the plant. Your discount rate is 6% (annual rate, annualcompounding).
Assume that you made the $800 million investment and the 5 yearsof permits, lawsuits and so forth have passed. The $800 millioninvestment was successful. Now you are debating if you should makethe plant or not today. What is the NPV of the plant?

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4.1 Ratings (577 Votes)

Since project NPV is 2285 millionhence you should accept the projectAmount in millionsInvestment made five year before800Value of investment after 5 years year 0 at 6 interest rate1071Investment needed after 5 years See Answer

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Transcribed Image Text

Given the new found interest in nuclear power plants due topotential carbon taxes, you consider starting a company to build anuclear power plant. Before you can build the plant, you need togather permits, fight lawsuits and so forth. That will cost $800million today and take 5 years to resolve with a 35% probability ofsuccess. If you build the plant, you must pay $9 billion the dayyou start building the plant, which is immediately after thelawsuits etc are resolved. The power plant itself takes 4 years tobuild. At that point the plant starts operating (exactly 4 yearsfrom when construction started). You receive $1 billion per yearfor 50 years starting one year from when the plant startsoperating. At the end of the project, you have to pay $3 billion toshut down the plant. Your discount rate is 6% (annual rate, annualcompounding).Assume that you made the $800 million investment and the 5 yearsof permits, lawsuits and so forth have passed. The $800 millioninvestment was successful. Now you are debating if you should makethe plant or not today. What is the NPV of the plant?