Final Project: PowerCo

Final Project: PowerCo
You are required to submit at the end of the semester a final project in
which you will determine whether PowerCo should construct a new
generator to meet an expected rise in demand for power. You will arrive
at your conclusions by analyzing the data below and answering a series
of interrelated questions. You will present your findings and recommenddations
in a report, the details of which are listed below in the section
“PowerCo: Your Analysis and Report.”
PowerCo: The Data
Consider the following situation:
PowerCo, a medium?sized power company, generates and sells
electricity throughout several states in the southeast United States.
They have been in business for more than 30 years and are the largest
power generator in the region. They believe that a significant increase
in the demand for electricity over the next 10–12 years will cause them
to be unable to meet the expected demand with their current
generation capabilities.
PowerCo’s senior management believes that they must build a new
generator to meet this increased demand and their Treasury
department was tasked with developing the financial projections for
building a new generator. Taking the expected revenues from the new
facility, developed by the firm’s economists and the expected costs of
building the new plant from the firm’s engineers, they have
developed financial projections to allow them to analyze the
prospective investment in a new generating facility.
It is expected that building the new generator will take approximately
2 years and will remain functional for at least 10 years. While
Treasury expects that the facility will continue to generate electricity
for longer than 10 years, they believe that financial projections for a
period longer than 10 years are too uncertain and so have limited
their estimates to 10 years of use.
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The financial projections, given on an annual basis in after?tax dollars, are
as follows (assume all cash flows occur at the end of the year):
1. The expected cash costs, in millions of dollars, of building the
facility:
2. The expected profits from the sale of electricity, in millions of
dollars:
3. The firm believes that its opportunity cost of capital is 8 percent
and so will use that rate to evaluate the project.
PowerCo: Your Analysis and Report
Answer questions 1–5 listed below in the section “PowerCo Analysis
Questions,” analyzing the data presented in the “Data” section. After
answering the five questions, you will need to assemble your answers to
form your final project, which should be presented in the following way:
? Title page with your name, date, course code, and name of your
mentor.
? Introduction to your analysis (briefly state your purpose).
Year Expected costs
1 25
2 28
Year Expected after tax profits
3 6
4 7
5 8
6 9
7 9
8 9
9 9
10 9
11 9
12 9
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? The main body of your analysis (i.e., your answers to questions 1–
4, below).
? Recommendations (your answer to question 5, below).
You are not required to follow a particular style of presentation, but
whichever one you use, you must be consistent.
When you are ready to send your final project to your mentor, go to the
Submit Assignments section of the course Web site and use the submit
function provided for the “Final Project.”
PowerCo Analysis Questions
Your answers to the following questions will form the main body of your
case analysis.
1. What is the present value of the expected costs? Show all
calculations.
2. What is the present value of the expected after?tax cash profits?
Show all calculations.
3. What is the expected net present value (the difference between the
PVs of the inflows and outflows)? Show the calculations. What
does this number represent? Be detailed in your responses.
4. What are the risks inherent in deciding to build the facility? How
would each of the risks affect the decision to build the facility? Be
specific.
5. Should PowerCo build the plant? Why or why not?

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