| June 8, 2016

Final Project: PowerCo You are required to submit at the end of the semester a final project inwhich you will determine whether PowerCo should construct a new generator to meet an expected rise in demand for power. You will arrive at your conclusions by analyzing the data below and answering a seriesof interrelated questions. You will present your findings and recommend‐dations in a report, the details of which are listed below in the section“PowerCo: Your Analysis and Report.”PowerCo: The DataConsider the following situation:PowerCo, a medium‐sized power company, generates and sellselectricity throughout several states in the southeast United States.They have been in business for more than 30 years and are the largestpower generator in the region. They believe that a significant increasein the demand for electricity over the next 10–12 years will cause themto be unable to meet the expected demand with their currentgeneration capabilities.PowerCo’s senior management believes that they must build a newgenerator to meet this increased demand and their Treasurydepartment was tasked with developing the financial projections forbuilding a new generator. Taking the expected revenues from the newfacility, developed by the firm’s economists and the expected costs ofbuilding the new plant from the firm’s engineers, they havedeveloped financial projections to allow them to analyze theprospective investment in a new generating facility. It is expected that building the new generator will take approximately2 years and will remain functional for at least 10 years. WhileTreasury expects that the facility will continue to generate electricityfor longer than 10 years, they believe that financial projections for aperiod longer than 10 years are too uncertain and so have limitedtheir estimates to 10 years of use.S‐33The financial projections, given on an annual basis in after‐tax dollars, areas follows (assume all cash flows occur at the end of the year):1. The expected cash costs, in millions of dollars, of building thefacility:2. The expected profits from the sale of electricity, in millions ofdollars:3. The firm believes that its opportunity cost of capital is 8 percentand so will use that rate to evaluate the project.PowerCo: Your Analysis and ReportAnswer questions 1–5 listed below in the section “PowerCo AnalysisQuestions,” analyzing the data presented in the “Data” section. Afteranswering the five questions, you will need to assemble your answers toform your final project, which should be presented in the following way:

Title page with your name, date, course code, and name of yourmentor. Introduction to your analysis (briefly state your purpose).Year Expected costs1 252 28Year Expected after tax profits3 64 75 86 97 98 99 910 911 912 9S‐34 The main body of your analysis (i.e., your answers to questions 1–4, below).

Recommendations (your answer to question 5, below).You are not required to follow a particular style of presentation, butwhichever one you use, you must be consistent.When you are ready to send your final project to your mentor, go to theSubmit Assignments section of the course Web site and use the submitfunction provided for the

“Final Project.”PowerCo Analysis Questions Your answers to the following questions will form the main body of yourcase analysis. 1. What is the present value of the expected costs? Show allcalculations.2. What is the present value of the expected after‐tax cash profits?Show all calculations.3. What is the expected net present value (the difference between thePVs of the inflows and outflows)? Show the calculations. Whatdoes this number represent? Be detailed in your responses.4. What are the risks inherent in deciding to build the facility? Howwould each of the risks affect the decision to build the facility? Bespecific.5. Should PowerCo build the plant? Why or why not?

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