1. Suppose a public project costs $1 billion in year 0 and 1.5 billion in year 1. Benefits are $1 billion in year 1 and $2 billion in year 2. The discount rate is 5%. (Set up a table with the benefits, costs, net benefits, and net present value in each year. Then write-out the equation - you do not need to solve it).
2. Consider a project to construct and run a utility-scale solar farm. The capital cost is $50 million. It takes a year to complete construction. Operating costs are $5 million a year. Revenue amounts to $10 million in the first and second year, and $20 million for the next three years (The utility-scale solar farm generates electricity for a total of 5 years).
[a] What is the net present value using a discount rate of 3% and 5% (round to the nearest whole number)? Should the project be built? (Hint: Your answer should include a table similar to that in question #1. Compute for the NPV in excel by modifying the lightbulb example we went over in class).
[b] What is the internal rate of return (IRR)? (This is the rate of return that makes the NPV=0.)
[c] What is the opportunity cost of building the utility-scale farm to generate electricity? (There is flexibility in the correct answer here—your response should reflect that you understand what opportunity cost means).
[d.] Suppose the alternative is to construct a wind farm. Applying a discount rate of 3%, the NPV is 2. Which project, if any, should be built?
3. Explain the concept of levelized cost of energy (LCOE) in no more than 2 sentences.