A city has identified two options for developing solar power capacity. The investment basis for comparison is 8 years, with interest 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 the end of each year for 4 years. At the end of year 4, the array will be expanded to 100% capacity, at a cost of $900,000. After the expansion, operating costs will become $350,000 per year.  Option B is to build a full-scale solar thermal electric generation plant now at a cost of $1.5 million, with end-of-year operating costs of $250,000.  Which option should be chosen?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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[College: Project Cost-Benefit Analysis Course, Economic Questions] - Can someone please explain the steps on how to complete these problems? Thank you in advance!

Problem 1 

A manufacturer wishes to make and sell 1.1 million units per year of an aviation part for 12 years with interest fixed at 14% per year.

Option A is to build a manufacturing plant in the United States at a cost of $7 million, with end-of-year expenses of $2 million per year. In order to meet environmental regulations, the manufacturer will need to invest $0.5 million for pollution control at the end of the fifth year. 

Option B is to build a manufacturing plant in Mexico for $4 million, with annual end-of-year expenses of $1.2 million. There will be a duty charge of 30% of the selling price in the United States. 

Find the aviation part selling price in the United States, at which the two options are equal. 


Problem 2 

A city has identified two options for developing solar power capacity. The investment basis for comparison is 8 years, with interest 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 the end of each year for 4 years. At the end of year 4, the array will be expanded to 100% capacity, at a cost of $900,000. After the expansion, operating costs will become $350,000 per year. 

Option B is to build a full-scale solar thermal electric generation plant now at a cost of $1.5 million, with end-of-year operating costs of $250,000. 

Which option should be chosen?

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