PROBLEM 13-2GivenSolution Legend First Plant= Value given in problemAssume perpetual returns= Formula/Calculation/Analysis requiredIRR13.00%= Qualitative analysis or Short answer requiredInitial investment$600 million= Goal Seek or Solver cellAnnual cash flow$78 million= Crystal Ball Input= Crystal Ball OutputSecond PlantInitial investment$550 millionAdditional PlantsInitial investment$500 millionNPV CalculationCost of capital15.00%First plant$(80.00) millionSecond plant$(30.00) millionAdditional plant$(20.00) millionCost of capital14.00%First plant$(42.86) millionSecond plant$7.14 millionAdditional plant$57.14 millionSolutiona.b.We are evaluating an investment strategy.c.The above analysis is based on expected cash flows, i.e., we assume that cash flows from the power plant are static. In reality, the NPV captures a range of scenarios. Over time, one would know which one of those scenarios (in terms of demand and price of electricity) will occur. Therefore, to analyze the option value of a power plant investment strategy, one has
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