Corry Energy has three separate investment choices with a 9% corporate hurdle ra
ID: 2804671 • Letter: C
Question
Corry Energy has three separate investment choices with a 9% corporate hurdle rate and $6 million to apply to capital investments in 2016. Choice 1 is to buy a lease on a wood burning electricity generating plant for $2 million that could be used to provide power to an already identified municipality generating net cash flows of $625,000 per year for five years, paid at the end of each year. After five years, the plant will need to be de-commissioned at a cost of $175,000. Choice 2 is to purchase already functioning wind turbines at a cost of $500,000 per turbine. These can each generate incremental annual cash flows of $120,000 per year for the next seven years, after which the turbines can be sold for scrap at $50,000 each. Choice 3 is to refurbish an existing coal burning plant at a cost of $3 million. This will generate additional cash flows of $450,000 per year for seven years, after which time the plant will revert to its current financial performance levels. How should Corry Energy proceed and why?
Explanation / Answer
Investment budget 6000000 Hurdle rate 9% Choice-1 Wood burning elec generating plant Years 0 1 2 3 4 5 Investment 2000000 cash flows 625000 625000 625000 625000 625000 Decommissioning cost 175000 Net cash flows -20,00,000.00 625000 625000 625000 625000 450000 IRR 15.18% Choice-2 Turbine Years 0 1 2 3 4 5 6 7 Investment 500000 cash flows 120000 120000 120000 120000 120000 120000 120000 salvage 50000 Net cash flows -5,00,000.00 120000 120000 120000 120000 120000 120000 170000 IRR 16.15% choice-3 Existing coal burning plant Years 0 1 2 3 4 5 6 7 Investment 3000000 cash flows 450000 450000 450000 450000 450000 450000 450000 Net cash flows -30,00,000.00 450000 450000 450000 450000 450000 450000 450000 IRR 1.23% So basis IRR Corry energy should go with wind turbines as it has the maximum retun potential