Hello, I\'ve been having trouble on this question and its parts - Any help/expla

Question

Hello, I've been having trouble on this question and its parts - Any help/explanation would be greatly appreciated.

A. Solar Power Plant Designs PSEG Long Island has committed to building a solar power plant. An Independent Engineer (IE) working for PSEG has been tasked with evaluating the three current designs. PSEG uses an interest rate of 10% and a 20-year horizon. Design 1: Flat Solar Panes A field of "flat" solar panels angled to best catch the sun will yield 2.6 MW of power and will cost $87 million initially with first-year operating costs at $2 million, growing $250,000 annually. It will produce electricity worth $6.9 million the first year and will increase by 8% each year thereafter Design 2: Mechanized Solar Panels A field of mechanized solar panels rotates from side to side so that they are always positioned parallel to the sun's rays, maximizing the production of electricity. This design will yield 3.1 MW of power and will cost $101 million initially with first-year operating costs at $2.3 million, growing $300,000 annually. It will produce electricity worth $8.8 million the first year and will increase 8% each year thereafter Design 3: Solar Collector Field This design uses a field of mirrors to focus the Sun's rays onto a boiler mounted in a tower. The boiler then produces steam and generates electricity the same way a coal-fired plant operates This system will yield 3.3 MW of power and will cost S91 million initially with first-year operating costs at $3 million, growing $350,000 annually. It will produce electricity worth $9.7 million the first year and will increase 8% each year thereafter Which one of the three designs is the most cost effective or economical and offer the most power of the three as well. Does your answer for (a) changes if PSEG uses an interest rate of 15% and 30-year horizon (all other things the same) Does your answer for (a) changes if PSEG uses an interest rate of 2% and 25-year horizon (all other things the same) a. b. c.

Explanation / Answer

Soln : In this , need to calculate the present value of projected cash flows for given time period and rate of return for all the 3 projects:

(a) rate, r = 10% and time period = 20%

Please refer the table for all 3 options , option 3 is the best option as giving total net value = $13.05mn, others are giving -ve value

b) If interest rate =15% and time = 30 years, please refer table, again the answer is design 3

c) Now, the rate =2% and time horizon = 25 years

Ans is still design 3 as we can see max. power with max. return is being provided by the design 3 only in all 3 cases.

Design 1: Flat solar panels Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Cash outflow 87.00 2.00 2.25 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00 6.25 6.50 6.75 Cash Inflow 6.90 7.45 8.05 8.69 9.39 10.14 10.95 11.83 12.77 13.79 14.90 16.09 17.38 18.77 20.27 21.89 23.64 25.53 27.57 29.78 Net cash flow -87.00 4.90 5.20 5.55 5.94 6.39 6.89 7.45 8.08 8.77 9.54 10.40 11.34 12.38 13.52 14.77 16.14 17.64 19.28 21.07 23.03 rate 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 PV -87.00 4.45 4.30 4.17 4.06 3.97 3.89 3.82 3.77 3.72 3.68 3.64 3.61 3.58 3.56 3.54 3.51 3.49 3.47 3.45 3.42 Total -11.90 Design 2: Mechanized solar panel Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Cash outflow 101.00 2.30 2.60 2.90 3.20 3.50 3.80 4.10 4.40 4.70 5.00 5.30 5.60 5.90 6.20 6.50 6.80 7.10 7.40 7.70 8.00 Cash Inflow 8.80 9.50 10.26 11.09 11.97 12.93 13.96 15.08 16.29 17.59 19.00 20.52 22.16 23.93 25.85 27.92 30.15 32.56 35.16 37.98 Net cash flow -101.00 6.50 6.90 7.36 7.89 8.47 9.13 9.86 10.68 11.59 12.59 13.70 14.92 16.26 17.73 19.35 21.12 23.05 25.16 27.46 29.98 rate 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 PV -101.00 5.91 5.71 5.53 5.39 5.26 5.15 5.06 4.98 4.91 4.85 4.80 4.75 4.71 4.67 4.63 4.60 4.56 4.53 4.49 4.46 Total -2.04 Design 3 : Solar collector field Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Cash outflow 91.00 3.00 3.35 3.70 4.05 4.40 4.75 5.10 5.45 5.80 6.15 6.50 6.85 7.20 7.55 7.90 8.25 8.60 8.95 9.30 9.65 Cash Inflow 9.70 10.48 11.31 12.22 13.20 14.25 15.39 16.62 17.95 19.39 20.94 22.62 24.43 26.38 28.49 30.77 33.23 35.89 38.76 41.86 Net cash flow -91.00 6.70 7.13 7.61 8.17 8.80 9.50 10.29 11.17 12.15 13.24 14.44 15.77 17.23 18.83 20.59 22.52 24.63 26.94 29.46 32.21 rate 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 PV -91.00 6.09 5.89 5.72 5.58 5.46 5.36 5.28 5.21 5.15 5.10 5.06 5.02 4.99 4.96 4.93 4.90 4.87 4.85 4.82 4.79 Total 13.05

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