Consider an investment in food processing. A milk processing plant in Nevada has an initial cost of $100 million. Building the same plant in California cost $200 million because of higher cost of meeting California GHG regulatory costs. Since the raw milk comes from California and the processed whole milk powder is to be shipped out from the port of Oakland the costs due to transport to and from the plant are $5 million per year more than if the plant were built in California. Assume the plant lasts approximately forever.
a. Explain in no more than three sentences why the interest rate (discount rate) matters in determining where to build the plant.
b. If the relevant interest rate is 10% where would the firm be most likely to build the plant? Explain and show your calculations.
c. At what interest rates would the firm consider building the plant in California? Explain and show your calculations?
d. Discuss in no more than four sentences how the GHG regulations that raise the cost of building in California have negative economic and environmental consequences.