Answer using excel and show formulas! A)What is the present value of the project
ID: 2785653 • Letter: A
Question
Answer using excel and show formulas!
A)What is the present value of the project at a 3% discount rate?
B)What is the present value of the project at the alternative discount rates of 1 percent and 5 percent? Comment on the difference.
1. (25 points) A plan is proposed to build a new wind farm in a scenic area. The initial construction costs (year 0) are estimated to be $10,000,000. Following start-up, annual maintenance costs of $150,000 are expected throughout the twenty-five year lifespan of the plant (years 1-25). In year twenty six, the wind farm will need to be dismantled, and the site restored, at an expected cost of $3,000,000. Every year after the initial construction year (i.e. years 1-25), the site will produce electricity with a market value of $850,000, which for now we take to be a constant flow in real terms (we will ignore the effects of inflation here). Objectors have protested about the visual impact of the windmills, and so the government has commissioned a contingent valuation study of local residents. The results suggest that the mean annual compensation demanded by locals is $30/household; there are 1,250 households thought to be affected. (This mean is calculated across both those against the project and those in favor.) What is the present value of the project at a 3 percent discount rate? What is the present value of the project at alternative discount rates of 1 percent and 5 percent? Comment on the difference a. b.Explanation / Answer
Initial Investments 10000000 Annual Cashflows Revanue 850000 Maintainance Cost 150000 Compensation 30*1250 37500 662500 Reinvestment cost year 26 3000000 Calculation Of PV Year Amount PVF 3% PVF 1% PVF 5% PV 3% PV 1% PV 5% 0 -10000000 1 1 1 -10000000 -10000000 -10000000 1 662500 0.970874 0.990099 0.952381 643203.88 655940.59 630952.38 2 662500 0.942596 0.980296 0.907029 624469.79 649446.13 600907.03 3 662500 0.915142 0.97059 0.863838 606281.35 643015.97 572292.41 4 662500 0.888487 0.96098 0.822702 588622.67 636649.48 545040.39 5 662500 0.862609 0.951466 0.783526 571478.32 630346.02 519086.09 6 662500 0.837484 0.942045 0.746215 554833.32 624104.97 494367.7 7 662500 0.813092 0.932718 0.710681 538673.13 617925.71 470826.38 8 662500 0.789409 0.923483 0.676839 522983.62 611807.63 448406.08 9 662500 0.766417 0.91434 0.644609 507751.09 605750.13 427053.41 10 662500 0.744094 0.905287 0.613913 492962.22 599752.61 406717.53 11 662500 0.722421 0.896324 0.584679 478604.1 593814.46 387350.03 12 662500 0.70138 0.887449 0.556837 464664.17 587935.11 368904.79 13 662500 0.680951 0.878663 0.530321 451130.26 582113.97 351337.89 14 662500 0.661118 0.869963 0.505068 437990.55 576350.47 334607.52 15 662500 0.641862 0.861349 0.481017 425233.54 570644.03 318673.83 16 662500 0.623167 0.852821 0.458112 412848.1 564994.09 303498.88 17 662500 0.605016 0.844377 0.436297 400823.4 559400.09 289046.56 18 662500 0.587395 0.836017 0.415521 389148.93 553861.47 275282.43 19 662500 0.570286 0.82774 0.395734 377814.49 548377.69 262173.75 20 662500 0.553676 0.819544 0.376889 366810.19 542948.21 249689.28 21 662500 0.537549 0.81143 0.358942 356126.4 537572.49 237799.32 22 662500 0.521893 0.803396 0.34185 345753.78 532249.99 226475.54 23 662500 0.506692 0.795442 0.325571 335683.28 526980.19 215690.99 24 662500 0.491934 0.787566 0.310068 325906.1 521762.56 205419.99 25 662500 0.477606 0.779768 0.295303 316413.69 516596.59 195638.09 26 -3000000 0.463695 0.772048 0.281241 -1391084 -2316144 -843722.2 145126.16 2274196.8 -1506484 Decrease in rate will increase the present value, and vice versa this is just a simple mathemital exercise as a lower rate will increase the pv factor and hence result in higher pv similarly higher rate will reduce the present value factors and that in return will decrease pv Please provide feedback…. Thanks In advance :-)
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