3. Evaluate a combined cycle power plant on the basis of the PW method when the MARR is 12% per year. Pertinent cost data are as follows: Power Plant (thousands of $) Investment cost $13,000 Useful life 15 years Market value (EOY 15) $3,000 Annual operating expenses $1,000 Overhaul cost-end of 5th year $200 Overhaul cost-end of 10 th year $550
3. Evaluate a combined cycle power plant on the basis of the PW method when the MARR is 12% per year. Pertinent cost data are as follows: Power Plant (thousands of $) Investment cost $13,000 Useful life 15 years Market value (EOY 15) $3,000 Annual operating expenses $1,000 Overhaul cost-end of 5th year $200 Overhaul cost-end of 10 th year $550
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:### Evaluation of a Combined Cycle Power Plant using the PW Method
#### Problem Statement:
Evaluate a combined cycle power plant on the basis of the Present Worth (PW) method when the Minimum Acceptable Rate of Return (MARR) is 12% per year. The pertinent cost data for the power plant are as follows:
#### Cost Data:
| Cost Component | Power Plant (thousands of $) |
| ----------------------------- | ---------------------------- |
| **Investment Cost** | $13,000 |
| **Useful Life** | 15 years |
| **Market Value (EOY 15)** | $3,000 |
| **Annual Operating Expenses** | $1,000 |
| **Overhaul Cost—End of 5th Year** | $200 |
| **Overhaul Cost—End of 10th Year** | $550 |
#### Explanation:
The table provides cost details necessary for evaluating the power plant using the Present Worth (PW) method, which involves discounting future costs and revenues to their present values using the MARR of 12%.
- **Investment Cost**: The initial cost to set up the power plant is $13,000,000.
- **Useful Life**: The power plant is expected to be operational for 15 years.
- **Market Value (EOY 15)**: The estimated residual or salvage value of the power plant at the end of its useful life is $3,000,000.
- **Annual Operating Expenses**: The yearly cost to operate the power plant is $1,000,000.
- **Overhaul Costs**: Periodic major maintenance costs are expected at:
- End of the 5th year: $200,000
- End of the 10th year: $550,000
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