Question

can you explain in details how did we come up with this answer and how to answer similar

company is considering a project to develop a nascent technology to harness energy from
ocean waves but wants to determine its economic viability. This 10-year project will cost the
company $10 million in research and development costs and $25 million to build infrastructure. Each
megawatt of energy costs $60 to produce, but the government offers a subsidy of $5 permegawatt.
The price per megawatt of energy will be $56 for the next five years, and the company expects to
produce 1 million megawatts per year. Ignoring the time value of money (i.e. assuming cash flows
across different years are directly comparable), if costs, output, and subsidies remain constant, what
will the market price of a megawatt of energy need to be in years six through ten to make this project
economically viable?
A. $56
B. $59
C. $61
D. $71

Answer 1

Total cost to be recovered=10+25=$35 million

Cost recocwry per MW =sales price+ subsidy-cost =56+5-60=$1

Total recovery per year for year 1 to 5= recovery per MW * total MW produced=1*1=$ 1 million

Total recovery over 5 years=1*5=$5 million

Remaining amount to be recovered =$30 million

Required recovery every year from year 6 to 10=30/5=$6 million

Required recovery per MW =6/1=$6

Hence the price should be $5 more than earlier to recover $6 million instead of $1 million

Hence the price should be 56+5=$61

Hence the price should be $61 to make project economically viable.

Option C is correct