Question 1 people clearly discount the future relative to

Question

Question 1: People clearly discount the future, relative to the present. But they may discount certain things more than others. Arrange the following in decreasing order of the likely discount rate. After you have made your list, write a few sentences justifying your choices.

a. A new car

b. An ice cream cone on a hot summer day

c. A human life

d. A new home

Scenario for Questions 2-4: The Vermont Yankee nuclear power plant is owned by the Entergy Corporation. Entergy recently announced shut down Vermont Yankee because they claimed it wasnot profitable to operate. In this scenario we will investigate the profitability of Vermont Yankee.

Question 2: Entergy purchased Vermont Yankee in 2002 for $180 million, which wewill use as the capital cost or "principal" of the plant. The capacity of the plant is 600,000kilowatts (kW), or 600 megawatts (MW). Calculate the levelized cost of energy for VermontYankee over its initial period of ownership by Entergy, from 2002 through 2013. In youranalysis, please treat 2002 as "Year 0" and 2003 as "Year 1" (and so on). Assume also thatEntergy uses an internal discount rate of 15% per year. The variable cost of operating a nuclearpower plant in the U.S. in 2002 was approximately $15 per MWh. Assume that Vermont Yankee produced 4,920,000 MWh per yearevery year from 2002 through 2013.

Question 3: Vermont Yankee was under contract to sell half of the plant's output toVermont utilities for $42 per MWh. The remainder of the plant's output is sold to ISO-NewEngland (ISO-NE) at the market price for Vermont. This price has averaged $55 per MWh since2002. Thus, the annual revenues for Vermont Yankee are given by the equation:

Revenue_t = (42 ×Q_t/2) + (ISO-NE Price ×Q_t/2) = $48.50/MWh ×Q_t

Where the subscript t indicates year t; thus Q_t is total electricity production at Vermont Yankee(in MWh) in year t.

Calculate annual revenues for Vermont Yankee and the net present value of the plant over theperiod 2002 to 2013. Can you calculate the internal rate of return for Vermont Yankee over thistime period? If so, make the calculation; if not, explain why not.

Question 4: Entergy is liable for a decommissioning cost of around $1.3 billion forVermont Yankee (assuming that the plant is indeed shut down in 2012). Assuming that Entergyhad to put $1.3 billion in an escrow fund in 2002 (so that the total capital cost of the plant was$180 million + $1.3 billion = $1.48 billion), how does the decommissioning cost change youranswer to Question 7?

Question 5: On ANGEL you will find a Microsoft Excel file called 'EBF304W_F15_HW1.xlsx.' The file contains annual output (in millions of BTUs annually) for two hypothetical natural gas wells. Both have roughly the same total lifetime production but different levels of initial production and different 'decline curves' (the rate at which production from a well declines over time). Calculate the present discounted value for each of the two natural gas wells, assuming a constant natural gas price of $5 per million BTU and an annual discount rate of 10%. Which gas well is more valuable, on a net present value basis? In a couple of sentences, explain why.