Question 1 Select any three measures of project worth you have studied. Explain how they are calculated and the criteria used by them to decide on project worth. Discuss the advantages and disadvantages of each measure of project worth in evaluating energy projects. Explain the reasons for the “Time Value of Money” and explain how a positive discount rate can affect the viability of a project. Explain what is meant by mutually exclusive projects, giving suitable energy project examples.

Question 2

By comparing the Levelized Cost of Energy, determine the more cost effective energy delivery option between a coal thermal plant and a hydro-electric plant with investment parameters shown on Table 1.

Table 1: Coal and Hydro Plant Comparison

General Parameters

Interest rate (i)

7%

Inflation rate (j)

3%

Time horizon (n)

25

Investment parameters

Hydro

Coal

Power (MW)

720

600

Time of full load (h/year)

6500

7,800

Specific investment cost ($/kW)

3,500

1,500

O&M cost/ (% of Io)

2%

5%

Coal consumption (t/y)

0

2,500,000

Coal price ($/t)

38

38

Life (N)

40

25

Question 3

An energy project with a lifespan of 15 years has investment parameters shown on Table 2.

Table 2: Parameters for Energy Project

Parameter

Value

Cut-off interest rate (i)

8%

Investment Cost (Io)

$5,000,000

Annual Revenue (R)

$1,000,000

Annual O & M Costs (C)

$ 200,000

Project Lifespan (N)

15 years Write down the NPV function for the project investment profile Calculate the NPV and IRR for the project Perform a sensitivity analysis and determine the “indifferent” points for each of the 5 project variables Determine the project variable to which project viability is (i) least and (ii) most sensitive

Question 4

Two mutually exclusive investment projects have investment profiles shown on Table 3.

Table 3: Investment profiles of 2 mutually exclusive projects

Investment Parameter

Project A

Project B

Interest rate

7%

7%

Project Lifespan

15 years

12 years

Investment

9,500,000

6,800,000

Annual O & M (year 1 to 5)

1,000,000

500,000

Annual O & M (rest of life)

1,200,000

600,000

Annual Revenue (year 1 to 5)

3,000,000

2,000,000

Annual Revenue (rest of life)

3,300,000

2,400,000 Calculate the NPV and IRR for each project. Is each project financial viable on its own merit? Using the incremental project approach, select the more suitable project to implement. At what discount rate would you be indifferent about implementing either project?

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