Question 3: The Muscat Electric Company ventures to a new project in the eastern part of the capital city which is a 200-kilometer, 300 kV transmission lines. The company has to choose between an Overhead Cable Transmission System and Underground Cable Transmission System. Table Q3 shows the initial investment for each type, the expected revenues during its lifetime whic ncludes the cost savings incurred by underground transmission system over the overhead transmission system. The company has estimated a salvage value for each type of transmission to be 5% of the initial investment. As a company cost of capital is 8% per year. Using the following techniques for capital investment appraisal, perform the following; (i) Discounted payback period; (ii) Net present value NPV; (ii) Internal rate of return IRR. (iv) Determine which of the alternative is acceptable to the company based on the above results. Underground Cable Transmission System 12,735 Items Table Q3: Revenue & Expenses in Million OMR Initial Investment (million OMR) Annual Revenue + cost savings (million OMR) Overhead Cable Transmission System 9,184 806 Annual Operating & Maintenance O&M Cost (million OMR) 1277 Increases by 2% per year Increases by 2% per year First 10 years: 210 Succeeding years: First 10 years: 3% increase per year 187 Succeeding years: 1.5% increase per year Annual taxes (million OMR) Life expectancy, years 10% of (Annual Revenue + cost savings) 50 10% of (Annual Revenue + cost savings) 40
Question 3: The Muscat Electric Company ventures to a new project in the eastern part of the capital city which is a 200-kilometer, 300 kV transmission lines. The company has to choose between an Overhead Cable Transmission System and Underground Cable Transmission System. Table Q3 shows the initial investment for each type, the expected revenues during its lifetime whic ncludes the cost savings incurred by underground transmission system over the overhead transmission system. The company has estimated a salvage value for each type of transmission to be 5% of the initial investment. As a company cost of capital is 8% per year. Using the following techniques for capital investment appraisal, perform the following; (i) Discounted payback period; (ii) Net present value NPV; (ii) Internal rate of return IRR. (iv) Determine which of the alternative is acceptable to the company based on the above results. Underground Cable Transmission System 12,735 Items Table Q3: Revenue & Expenses in Million OMR Initial Investment (million OMR) Annual Revenue + cost savings (million OMR) Overhead Cable Transmission System 9,184 806 Annual Operating & Maintenance O&M Cost (million OMR) 1277 Increases by 2% per year Increases by 2% per year First 10 years: 210 Succeeding years: First 10 years: 3% increase per year 187 Succeeding years: 1.5% increase per year Annual taxes (million OMR) Life expectancy, years 10% of (Annual Revenue + cost savings) 50 10% of (Annual Revenue + cost savings) 40
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
Problem 1PS
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Transcribed Image Text:Question 3:
The Muscat Electric Company ventures to a new project in the eastern part of the capital city which is a 200-kilometer, 300 kV transmission lines. The company has to choose between an
Overhead Cable Transmission System and Underground Cable Transmission System. Table Q3 shows the initial investment for each type, the expected revenues during its lifetime which
includes the cost savings incurred by underground transmission system over the overhead transmission system. The company has estimated a salvage value for each type of transmission
to be 5% of the initial investment. As a company cost of capital is 8% per year. Using the following techniques for capital investment appraisal, perform the following;
(i) Discounted payback period;
(ii) Net present value NPV;
(iii) Internal rate of return IRR.
(iv) Determine which of the alternative is acceptable to the company based on the above results.
Table Q3: Revenue & Expenses in Million OMR
Overhead
Underground
Items
Cable Transmission
Cable Transmission
System
System
Initial Investment
9,184
12,735
(million OMR)
Annual Revenue + cost
806
1277
savings
(million OMR)
Increases by 2% per year
Increases by 2% per year
First 10 years:
First 10 years:
210
187
Annual Operating &
Succeeding years:
1.5% increase per year
Maintenance 0&M Cost
Succeeding years:
(million OMR)
3% increase per year
Annual taxes
10% of (Annual Revenue +
cost savings)
10% of (Annual Revenue +
cost savings)
(million OMR)
Life expectancy, years
50
40
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