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Evaluate the five alternative production projects using traditional discounted




THE TENNESSEE VALLEY AUTHORITY;THE COST OF POWER;Bob G. Wood;Salisbury University;Steven B. Isbell;Tennessee Tech University;INTRODUCTION;While TVAs core mission has remained... Show more;TVA.docx Download Attachment;THE TENNESSEE VALLEY AUTHORITY: THE COST OF POWER;Read over the case. You may want to research the Tennessee Valley Authority (TVA) at;;**Please be specific and detailed with answers and show all work. Thank you.;Evaluate the five alternative production projects using traditional discounted cash flow analysis;a) What is the appropriate cost of capital for this case? Support your reasoning.;Note that the marginal cost of capital is the appropriate input for capital budgeting;decisions. This rate should best estimate of the current cost of raising additional debt of;similar risk. (The historical average of 5.5% is not correct.);b) Fill in the following operating characteristics of each of the production alternatives?;I have completed the first one for you Natural Gas.;Plant Type;Natural Gas;Nuclear;Wind;Solar;Coal;Useful Life;(Years);20;Cost (In Millions $);650;Expected Annual Cash Flows;(In Millions $);85;c) Calculate the net present value (NPV) and internal rate of return (IRR) for each of the;alternatives: natural gas plant, nuclear plant, wind plant, solar plant and coal plant.;Use the excel template to complete this.;The first one is completed for you Natural Gas. Be sure, however, to enter the cost of;capital you determined in part a as the WACC (weighted average cost of capital). This will;change the NPV for Natural Gas.;b) Other;Address the important question of what mix of projects should be pursued? Explain why.;Keep in mind that the total long-term debt funding available to TVA is $30 billion and the;current level is almost $9 billion. Also note that the needed additional power generation;from new construction is 2,835 MW.;Might there be additional factors other than cost and return that ought to be considered?;Well identify two and speak to them briefly.;Some Helpful pointers;This case is rich with information. To assist you get started on the right foot please note;that the information you need to complete the discounted cash flow analysis comes;largely from page 7. You need to provide for an estimate for appropriate cost of capital;however, in order to complete the analysis. The discussion on funding considerations;which starts on page 5 into page 6 should go a long way to assist you with the info.;Keeping apples with apples, so to speak, the estimation of useful/expected lives in this;case study are provided in terms of "from the day construction is started" as construction;times vary across the five alternatives.;Keep in mind that TVA is seeking to provide for additional power generation of 2,835MW;and looking to the feasibility of 5 production alternatives to meet this need.;Note that a capital budgeting decision never includes sunk costs in their;analysis, meaning that the "values" of TVA's existing facilities are not relevant! It's in the;past and should not affect TVA's decision regarding the production alternative to now;pursue. That said, one should approach capital budgeting decisions in terms of;incremental cash flows. So in other words, if TVA elects to pursue any one of these new;construction projects (ie. a natural gas plant), what changes? Answering this question is;the upfront cost to take it on as well as the incremental stream of annual cash inflows;from the business generated.


Paper#29939 | Written in 18-Jul-2015

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