CH 5 #7 The New York State Utility Company is considering the construction of a new utility plant. It has accumulated the following cost information: ItemFossil plant (oil and gas)Nuclear plantInitial outlay$60,000,000$100,000,000Annual operating cost15,000,00020,000,000aNotea This is the projected cost for year 1. It is expected that the operating costs of the nuclear plant will decrease by $2,000,000 per year and level off at $10,000,000. The expected decrease is a result of decreased fuel costs. Both plants have an expected useful life of 50 years.Assume the hurdle rate for this project is 0.05 per year.Which plant should be built?Assume that if the nuclear plant is not built the needed electricity can be purchased at a cost of $16 million per year. Should it be built? ### Annual Equivalent Costs and Replacement Decisions#### 6. Excess Capacity in A Corporation's Computer SystemThe A Corporation’s current computer system has excess capacity. The corporation is considering a shift to a more powerful computer, with calculations made for five years from now, but an updated estimate suggests this shift should occur in four years. The annual cost of the current computer is $1 million, and the cost for the new computer will be $1.5 million per year. The hurdle rate for this project is 0.05. The task is to estimate the cost of adding this report, assuming the report influences computer replacement timing.#### 7. New York State Utility Company Plant ConstructionThe New York State Utility Company is evaluating the construction of a new plant, comparing fossil plants and nuclear plants with the following costs:- **Fossil Plant (oil and gas)** - Initial outlay: $60,000,000 - Annual operating cost: $15,000,000 - **Nuclear Plant** - Initial outlay: $100,000,000 - Annual operating cost: $20,000,000**Note:** The operating costs for the nuclear plant decrease by $2,000,000 per year until they reach $10,000,000, due to reduced fuel costs. Both plant types are expected to have a 50-year lifespan. A hurdle rate of 0.05 per year is assumed.##### Questions:a. Determine which plant to build.b. Evaluate if electricity should be bought at $16 million per year, rather than building a nuclear plant.#### 8. Electricity Cost AnalysisAssuming the needed electricity cost is $17 million:a. Consider whether the nuclear plant should be built.b. Calculate the present value of building the plant after six years, when the operation costs would be $10 million per year, compared to buying electricity.#### 9. A Corporation’s Component Plant ProposalA Corporation contemplates building a new plant and the accompanying utilities. The cost details are:- **Plant** - Cost: $20,000,000 - Expected life: 40 years - **Utilities** - Cost: $10,000,000 - Expected life: 20 yearsThe analysis requires calculating the financial implications and strategic advisement for each decision using hurdle rates, present value computations, and cost comparisons.

Answered: a This is the projected cost for year…

FINANCIAL ACCOUNTING

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ISBN:9781259964947

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Chapter1: Financial Statements And Business Decisions

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CH 5 #7 The New York State Utility Company is considering the construction of a new utility plant. It has accumulated the following cost information:

Item	Fossil plant (oil and gas)	Nuclear plant
Initial outlay	$60,000,000	$100,000,000
Annual operating cost	15,000,000	20,000,000^a

Note

a This is the projected cost for year 1. It is expected that the operating costs of the nuclear plant will decrease by $2,000,000 per year and level off at $10,000,000. The expected decrease is a result of decreased fuel costs. Both plants have an expected useful life of 50 years.

Assume the hurdle rate for this project is 0.05 per year.

Which plant should be built?
Assume that if the nuclear plant is not built the needed electricity can be purchased at a cost of $16 million per year. Should it be built?

### Annual Equivalent Costs and Replacement Decisions

#### 6. Excess Capacity in A Corporation's Computer System
The A Corporation’s current computer system has excess capacity. The corporation is considering a shift to a more powerful computer, with calculations made for five years from now, but an updated estimate suggests this shift should occur in four years. The annual cost of the current computer is $1 million, and the cost for the new computer will be $1.5 million per year. The hurdle rate for this project is 0.05. The task is to estimate the cost of adding this report, assuming the report influences computer replacement timing.

#### 7. New York State Utility Company Plant Construction
The New York State Utility Company is evaluating the construction of a new plant, comparing fossil plants and nuclear plants with the following costs:

- **Fossil Plant (oil and gas)**
- Initial outlay: $60,000,000
- Annual operating cost: $15,000,000

- **Nuclear Plant**
- Initial outlay: $100,000,000
- Annual operating cost: $20,000,000

**Note:** The operating costs for the nuclear plant decrease by $2,000,000 per year until they reach $10,000,000, due to reduced fuel costs. Both plant types are expected to have a 50-year lifespan. A hurdle rate of 0.05 per year is assumed.

##### Questions:
a. Determine which plant to build.
b. Evaluate if electricity should be bought at $16 million per year, rather than building a nuclear plant.

#### 8. Electricity Cost Analysis
Assuming the needed electricity cost is $17 million:

a. Consider whether the nuclear plant should be built.
b. Calculate the present value of building the plant after six years, when the operation costs would be $10 million per year, compared to buying electricity.

#### 9. A Corporation’s Component Plant Proposal
A Corporation contemplates building a new plant and the accompanying utilities. The cost details are:

- **Plant**
- Cost: $20,000,000
- Expected life: 40 years

- **Utilities**
- Cost: $10,000,000
- Expected life: 20 years

The analysis requires calculating the financial implications and strategic advisement for each decision using hurdle rates, present value computations, and cost comparisons.

Expert Solution

Step 1

(1) Fossil plant (oil and gas) should be made because it can be clearly seen that the cost of Initial outlay and annual operating cost of Fossil plant is much less than the Nuclear plant.

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