Question5 Florida Power and Light has committed to building

Question.5 Florida Power and Light has committed to building a solar power plant. JoAnne, an industrial engineer working for FPL, has been charged with evaluating the three current designs. FPL uses an interest rate of 10% and a 20-year horizon. Design : Flat Solar Panels A field of flat\" solar panels angle 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 increasing 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 at right angles to the sun\'s rays, maximizing the production of electricity. This design will yield 3.1 MW of power and will cost $10 million initially with first- year operating costs at $2.3 million, growing by $300,000 annually. It will produce electricity worth $8.8 million the first year and increasing 8% each year thereafter. Design3: 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 as a coal fired plant. This system will yield 3.3 MW of power and will cost $91 million initially with first-year operating costs at $3 million, growing by $350,000 annually. It will produce electricity worth $9.7 million the first year and increasing 8% each year thereafter.

Solution

Design 1: Flat Solar Panels Year cash outflows Cash inflows Net cash flows = Cash inflows - cash outflows Present value factors                              @10% Present value of Net cash flow 0 $87,000,000 0 1 1 $2,000,000 $6,900,000 $4,900,000 0.9091 $4,454,545.45 2 $2,250,000 $7,452,000.00 $5,202,000 0.8264 $4,299,173.55 3 $2,500,000 $8,048,160.00 $5,548,160 0.7513 $4,168,414.73 4 $2,750,000 $8,692,012.80 $5,942,013 0.6830 $4,058,474.69 5 $3,000,000 $9,387,373.82 $6,387,374 0.6209 $3,966,056.61 6 $3,250,000 $10,138,363.73 $6,888,364 0.5645 $3,888,301.75 7 $3,500,000 $10,949,432.83 $7,449,433 0.5132 $3,822,736.93 8 $3,750,000 $11,825,387.45 $8,075,387 0.4665 $3,767,227.85 9 $4,000,000 $12,771,418.45 $8,771,418 0.4241 $3,719,937.67 10 $4,250,000 $13,793,131.93 $9,543,132 0.3855 $3,679,290.47 11 $4,500,000 $14,896,582.48 $10,396,582 0.3505 $3,643,938.74 12 $4,750,000 $16,088,309.08 $11,338,309 0.3186 $3,612,734.69 13 $5,000,000 $17,375,373.81 $12,375,374 0.2897 $3,584,704.98 14 $5,250,000 $18,765,403.71 $13,515,404 0.2633 $3,559,028.21 15 $5,500,000 $20,266,636.01 $14,766,636 0.2394 $3,535,015.26 16 $5,750,000 $21,887,966.89 $16,137,967 0.2176 $3,512,091.79 17 $6,000,000 $23,639,004.24 $17,639,004 0.1978 $3,489,782.95 18 $6,250,000 $25,530,124.58 $19,280,125 0.1799 $3,467,699.88 19 $6,500,000 $27,572,534.54 $21,072,535 0.1635 $3,445,527.78 20 $6,750,000 $29,778,337.31 $23,028,337 0.1486 $3,423,015.60 Total $75,097,699.59 Net present value = - $ 87,000,000 + $75,097,699.59 Net present value = - $11,902,300.41 Design 2: Mechanized Solar Panels Year cash outflows Cash inflows Net cash flows = Cash inflows - cash outflows Present value factors                              @10% Present value of Net cash flow 0 $101,000,000 1 1 $2,300,000 $8,800,000 $6,500,000 0.9091 $5,909,090.91 2 $2,600,000 $9,504,000.00 $6,904,000 0.8264 $5,705,785.12 3 $2,900,000 $10,264,320.00 $7,364,320 0.7513 $5,532,922.61 4 $3,200,000 $11,085,465.60 $7,885,466 0.6830 $5,385,879.11 5 $3,500,000 $11,972,302.85 $8,472,303 0.6209 $5,260,633.49 6 $3,800,000 $12,930,087.08 $9,130,087 0.5645 $5,153,696.13 7 $4,100,000 $13,964,494.04 $9,864,494 0.5132 $5,062,045.20 8 $4,400,000 $15,081,653.57 $10,681,654 0.4665 $4,983,070.22 9 $4,700,000 $16,288,185.85 $11,588,186 0.4241 $4,914,522.02 10 $5,000,000 $17,591,240.72 $12,591,241 0.3855 $4,854,468.36 11 $5,300,000 $18,998,539.98 $13,698,540 0.3505 $4,801,254.69 12 $5,600,000 $20,518,423.17 $14,918,423 0.3186 $4,753,469.37 13 $5,900,000 $22,159,897.03 $16,259,897 0.2897 $4,709,912.99 14 $6,200,000 $23,932,688.79 $17,732,689 0.2633 $4,669,571.18 15 $6,500,000 $25,847,303.89 $19,347,304 0.2394 $4,631,590.73 16 $6,800,000 $27,915,088.20 $21,115,088 0.2176 $4,595,258.40 17 $7,100,000 $30,148,295.26 $23,048,295 0.1978 $4,559,982.34 18 $7,400,000 $32,560,158.88 $25,160,159 0.1799 $4,525,275.73 19 $7,700,000 $35,164,971.59 $27,464,972 0.1635 $4,490,742.32 20 $8,000,000 $37,978,169.32 $29,978,169 0.1486 $4,456,063.85 Total $98,955,234.80 Net present value = - $101,000,000 + $98,955,234.80 NPV = - $2,044,765.20 Design 3: Solar Collector Field Year cash outflows Cash inflows Net cash flows = Cash inflows - cash outflows Present value factors                              @10% Present value of Net cash flow 0 $91,000,000 1 1 $3,000,000 $9,700,000 $6,700,000 0.9091 $6,090,909.09 2 $3,350,000 $10,476,000.00 $7,126,000 0.8264 $5,889,256.20 3 $3,700,000 $11,314,080.00 $7,614,080 0.7513 $5,720,571.00 4 $4,050,000 $12,219,206.40 $8,169,206 0.6830 $5,579,677.89 5 $4,400,000 $13,196,742.91 $8,796,743 0.6209 $5,462,085.25 6 $4,750,000 $14,252,482.34 $9,502,482 0.5645 $5,363,903.55 7 $5,100,000 $15,392,680.93 $10,292,681 0.5132 $5,281,772.78 8 $5,450,000 $16,624,095.41 $11,174,095 0.4665 $5,212,797.97 9 $5,800,000 $17,954,023.04 $12,154,023 0.4241 $5,154,492.22 10 $6,150,000 $19,390,344.88 $13,240,345 0.3855 $5,104,726.12 11 $6,500,000 $20,941,572.47 $14,441,572 0.3505 $5,061,683.05 12 $6,850,000 $22,616,898.27 $15,766,898 0.3186 $5,023,819.69 13 $7,200,000 $24,426,250.13 $17,226,250 0.2897 $4,989,831.06 14 $7,550,000 $26,380,350.14 $18,830,350 0.2633 $4,958,619.72 15 $7,900,000 $28,490,778.16 $20,590,778 0.2394 $4,929,268.58 16 $8,250,000 $30,770,040.41 $22,520,040 0.2176 $4,901,016.93 17 $8,600,000 $33,231,643.64 $24,631,644 0.1978 $4,873,239.38 18 $8,950,000 $35,890,175.13 $26,940,175 0.1799 $4,845,427.30 19 $9,300,000 $38,761,389.14 $29,461,389 0.1635 $4,817,172.55 20 $9,650,000 $41,862,300.27 $32,212,300 0.1486 $4,788,153.18 Total $104,048,423.52 Net present value = - $91,000,000 + $104,048,423.52 NPV = $13,048,423.52 Therefore the design 3 is recommended, because NPV of the design 3 is positive when compared to the other two desings.