A public private initiative in Texas will significatly expand the wind generated

ID: 1194568 • Letter: A

Question

A public private initiative in Texas will significatly expand the wind generated energy through out the state. The cash flow for one phase of the project involving Centrasl point Energy, a transmission utility company, is shown. Given reinvestment rate of 14% per year for excess funds and 10% per year for borrowing rate for extra funds, determine: given MARR= 12%

Year Net Cash Flow

0 -50000

1 +22000

2 +38000

3 -2000

4 -1000

5 +5000

a) How many number of ROR values is expected and why?

b) Calculate the external rate of return.

c) Is the project economically viable?

Explanation / Answer

There can be two types of ROR is possible, one is external rate of return and other is internal rate of return. External rte of return will include the cost of borrowing additional money for transaction.

Year

Net Cash Flow

Reinvestment

Cost of investment

Net cash Flow

-50000

-5000

-55000

22000

3080

18920

16892.86

38000

5320

32680

26052.3

-2000

-200

-2200

-1565.92

-1000

-100

-1100

-699.07

5000

700

4300

2439.935

NET Income

45385.09

NET PW

-11879.9

Net Cost

-55699.1

ERR

13%

If cashflow is positive, Reinvestment amount= Cashflow*14/100

If cashflow is negative, Cost of investment=Cashflow*10/10

PW= net cash flow/(1+i)^t where i=.12

ERR is the value of I for which net PW is zero.

No the project is not economically viable, as the net income from the project is negative.