2. Mnvircaneand Partners produces its own electric power. The plant's power capacity exceeds its own requirements. Mr.ny. Drand Partners has been offered a contract to sell excess power to a nearby utility company. Mr. r. por and Partners would supply the utility company with 20 000 megawatt-hours per year (MWh/a) for 10 years. The contract would specify a price of $22.75 per megawatt-hour for the first year of supply, which would rise by 1% per year after this. This price is independent of the rate of inflation over the 10 years. Mrvni ice and Partners would incur a first cost to connect its plant to the utility system. There would also be operating costs attributable to the contract. Mr. and Partners believes the price of yearly operating costs would increase over time at the inflation rate. The terms of the contract and Mr. osrly and Partners' costs are shown in the tables below. Sale of Power Output price in year 1 (S/MWh) 22.75
2. Mnvircaneand Partners produces its own electric power. The plant's power capacity exceeds its own requirements. Mr.ny. Drand Partners has been offered a contract to sell excess power to a nearby utility company. Mr. r. por and Partners would supply the utility company with 20 000 megawatt-hours per year (MWh/a) for 10 years. The contract would specify a price of $22.75 per megawatt-hour for the first year of supply, which would rise by 1% per year after this. This price is independent of the rate of inflation over the 10 years. Mrvni ice and Partners would incur a first cost to connect its plant to the utility system. There would also be operating costs attributable to the contract. Mr. and Partners believes the price of yearly operating costs would increase over time at the inflation rate. The terms of the contract and Mr. osrly and Partners' costs are shown in the tables below. Sale of Power Output price in year 1 (S/MWh) 22.75
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2. Mnvircaneand Partners produces its own electric power. The plant's power capacity exceeds its
own requirements. Mr. ny. Drand Partners has been offered a contract to sell excess power to a
nearby utility company. Mr. r. Dor and Partners would supply the utility company with 20 000
megawatt-hours per year (MWh/a) for 10 years. The contract would specify a price of $22.75
per megawatt-hour for the first year of supply, which would rise by 1% per year after this. This
price is independent of the rate of inflation over the 10 years.
Mrul ice and Partners would incur a first cost to connect its plant to the utility system. There
would also be operating costs attributable to the contract. Mr. and Partners believes the
price of yearly operating costs would increase over time at the inflation rate. The terms of the
contract and Mr. osrly and Partners' costs are shown in the tables below.
Output price in year 1 (S/MWh)
Price adjustment (yearly)
Power to be supplied (MWh/a)
Contract length
First cost now (S)
Operating cost in year 1 (S)
Current dollar MARR
Sale of Power
Costs
22.75
1% per year
20 000
10 years
200 000
390 000
20%
(a) Find the present worth of the contract under the assumption that there is no inflation over
the life of the contract.
(b) Find the present worth of the contract under four assumptions: inflation is (i) 1 percent per
year, (ii) 2 percent per year, (iii) 3 percent per year, and (iv) 4 percent per year.
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