Question

Near the Sawtooth Mountains in central Idaho, the town of Stanley is looking at developing its geothermal resources. In part, this is to make the long, cold winters pass a bit more comfortably (hot tubs for everyone!), but it intended to be the primary heating source for the town. Stanley isn’t very wealthy, so it's looking at developing the geothermal energy and paying for it over 30 years. At the end of 30 years, the system will be junk, worth nothing.

The data for the project are indicated in the Table below. Note that all values are in nominal dollar terms (actual market values), initially valued at the end of year zero dollars, and increasing at the rate of x% per year in nominal terms. The inflation rate is 2% per annum. All annual values accrue at the end of each year.

(a). What is the net present value of the investment at 5% and 10% (these discount rates are in real terms.)?

(b). The town is planning to finance the fixed costs by borrowing. What does the city need to charge annually to its 1,000 year-round residents to pay off the fixed costs?

(c). A conservation group dedicated to clean rivers is concerned that discharges of spent or unused geothermal water into the local stream will decimate trout populations. They point out that the data in the table do not reflect this environmental loss. Net tourism benefits from trout fishing during year zero (at the beginning of year 1) can be conservatively estimated at $50,000, and tourism net-benefits have historically been increasing at the rate of 5% per annum. If the project planners take this additional annual loss into account, what is the NPV of the project at 5% and 10%?

Benefit and Cost:            

Benefits:

Annual savings in heating expenses: initial value=200,000, increasing at 5% per year.

Tax revenue increase: Initial value 100,000, rising at 5% per year, nominal.

Operating Costs:

Annual labor costs: initial value=150,000, rising at 2% per year.

Annual energy costs (for running pumps, etc.): initial value=25,000, increasing at 5% per year.

Annual maintenance expenses: initial value=10,000 per year, increasing at 5% per year.

Annual insurance costs: initial value=1000, increasing at 2% per year.

Fixed costs:

Equipment purchase: 100,000

Equipment installation: 100,000

Building construction costs: 75,000

Licensing, inspections, etc.: 1,000      

Answer 1

Ans a, NPV at 5%

NPV at 10% rate

ans b, total fixed cost= equipment installation+ equipment purchase+building cost construction+ licensing inspection etc =100000+100000+75000+1000=276000

Population in town =1000

So fixed cost collected from each person in town=total fixed cost/population=276000/1000=276

Ans c, NPV at 5%

NPV at 10%