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Category > Economics Posted 17 May 2017 My Price 5.00

XL energy

XL energy is considering a project to set up windmills next to the Stone Arch bridge. Setting up these windmills will cost $500 million upfront, but it will qualify the firm to receive a “clean energy subsidy” of an amount $60 million each year. In addition, it will reduce XL energy’s reliance on the market for coal and reduce cost of production by $15 million each year. In general the lifespan of windmills is 3 years at the end of which they will have to be dismantled and sold for scrap for 15 percent of their initial cost. The subsidies arrive at the beginning of every year. All estimates of avoided costs are made assuming that they occur at the beginning of the year. The nominal discount rate through the whole period is 8 percent and the rate of inflation is 4 percent. Should XL energy invest in this project?

 

Please show how to do the problem using the discount rate and rate of inflation. Please do not take the answer from Chegg as that response is unhelpful for understanding how to do the problem.

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SuperTutor
(15)
Status NEW Posted 17 May 2017 07:05 AM My Price 5.00

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