This will produce an income of £3 430 000 per year, from which Victoria deducts the £300 000 spent
on uranium fuel to obtain a net income of £3 130 000 per year. So after the plant comes on line at the
end of the third year, it will be a further 7 000 / 3 130 = 2.24 years before the project becomes
profitable. This shows that the payback period is 5.2 years.
Based on payback period, the nuclear power station looks like the better investment. However, note
that if Victoria were to define the first project as building a single windmill, it would then appear that
this was the better investment, since the payback time would be slightly shorter than that for the power
station. Then, having chosen to build a single windmill, she could next year consider building one
additional windmill. This would again have a payback period of five years, so again would be preferred
to the nuclear power station. This illustrates the weakness of the `payback period' method of comparing
projects.
Victoria now goes on to consider the `present worth' method of comparison, giving all figures in
£ 000's:
PW(windmill)
= - 1 500(
P/A
,0.2,4)(
F/P
,0.2,1)
+ 300(
P/A
,0.2,20) + 300(
P/A
, 0.2,20)(
P/F
,0.2,1)
+ 300(
P/A
, 0.2, 20) (
P/F
,0.2,2) + 300(
P/A
, 0.2,20) (
P/F
,0.2,3)
+ 100((
P/F
,0.2,21) + (
P/F
,0.2,22) + (
P/F
,0.2,23) +
(P/F
,0.2,24))
Note the factor of (
F/P
,0.2,1) in the construction costs is needed to represent the fact that this series
starts at the
beginning
of the first year. There are several ways we could have represented the energy