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prob sol 13-2 - PROBLEM 13-2 Given First Plant Assume...

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PROBLEM 13-2 Given Solution Legend First Plant = Value given in problem Assume perpetual returns = Formula/Calculation/Analysis required IRR 13.00% = Qualitative analysis or Short answer required Initial investment $600 million = Goal Seek or Solver cell Annual cash flow $78 million = Crystal Ball Input = Crystal Ball Output Second Plant Initial investment $550 million Additional Plants Initial investment $500 million NPV Calculation Cost of capital 15.00% First plant $(80.00) million Second plant $(30.00) million Additional plant $(20.00) million Cost of capital 14.00% First plant $(42.86) million Second plant $7.14 million Additional plant $57.14 million Solution a. 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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