Question: A proposed steel mill may include a co-generation electrical plant. This plant will add $2.3M in first cost with net annual savings of $0.27M considering operating costs and electrical bills. The plant will have a $0.4M salvage value after 25 years. The firm uses an interest rate of 12% and present worth index (PWI) in its decision making. The public utility offers a subsidy for cogeneration facilities because it will not have to invest as much in new capacity. This subsidy is calculated as 20% of the co-generation facility's first cost, but it is paid annually. The utility calculates the subsidy using a benefit-cost ratio at 8% and a life of 20 years.
(a) Is the plant economically justifiable to the firm without the subsidy? What is the PWI?
(b) What is the annual subsidy?
(c) Is the plant economically justifiable to the firm with the subsidy? Now what is the PWI?
(d) How important is the difference in interest rates, and how does it affect these results?
(e) How important is the difference in horizons, and how does it affect these results?