Problem:
L&M Power
In the next two years, a large municipal gas company must begin constructing new gas storage facilities to accommodate the Federal Energy Regulatory Commission's Order 636 deregulating the gas industry. The vice-president in charge of the new project believes there are two options. One option is an underground deep storage facility (UDSF) and the other is a liquified natural gas facility (LNGF). The vice-president has developed a project selection model and will use it in presenting the project to the president. For the models she has gathered the following information:
Initial Cost Operating Cost/Cu. Ft. Expected Life Salvage Value
UDSF $10,000,000 $0.004 20 years 10%
LNGF 25,000,000 0.002 15 5
Since the vice-president's background is in finance, she believes the best model to use is a financial one, net present value analysis.
Questions: Would you use this model? Why or why not?