Midwest Power and Light operates 14 coal-fi red power plants in several stales a
ID: 2721216 • Letter: M
Question
Midwest Power and Light operates 14 coal-fi red power plants in several stales around the United States. The company recently settled a lawsuit by agreeing to pay $60 million in mitigation costs related to acid rain. The settlement included $21 million to reduce emissions from barges and trucks in the Ohio River Valley, $24 million for projects to conserve energy and produce alternative energy. $3 million for Chesapeake Bay, $2 million for Shenandoah National Park, and $10 million to acquire ecologically sensitive lands in Appalachia. The question of how to distribute the money over time has been posed. Plan A involves spending $5 million now and the remaining $55 million equally over a 10-year period (that is. $5.5 million in each of years 1 through 10). Plan B requires expenditures of $5 million now, $25 million 2 years from now, and $30 million 7 years from now. Determine which plan is more economical on the basis of a present worth analysis over a 10-year period at an interest rate of 10% per year.Explanation / Answer
Plan A
Net Present Worth=5+5.5*Annuity Factor (10% and 10 years)
Net Present Worth=5+5.5*6.145=$38.8M
Plan B
Net Present Worth=5+25/(1.1^2)+30/(1.1^7)
Net Present Worth=$41.06M
Since Net Present worth of Plan A is lower thus Plan A is more economical