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?