Home Work In the 1950 and early 60s Nuclear power plants were being built. They used only a few lbs of uranium which seemed to mean almost no cost for fuel. It was believed by many the electricity would be “too cheap to meter”. In other words they expected that you would pay a flat “power fee” every month to your electric company and then use what ever you needed –(Like a cell phone with unlimited air time)

HW continued Near Chicago a hypothetical utility named “Take Your Wealth Edison” aggressively began building nuclear plants. Consider the case of a “Take Your Wealth Edison” engineer (Nerd Nukey) planning a 1000 megawatt power plant (1,000,000 kilowatt). Nerd believes the plant will cost $1,150 per kilowatt to build. A- How much does Nerd believe this plant will cost? –Hint - multiply 1,000,000 kilowatts by $1,150 per kilowatt

HW continued Nerd proposes to issue bonds to pay for 80% of the power plant. –B- How many dollars worth of bonds does Nerd want to issue? Hint - multiply the cost of the power plant from A by 0.8 –C- How much money will “Take Your Wealth Edison” have to come up with?

HW continued Nerd expects to get low cost bonds at 3.5% interest over 30 years. –D - What will the Utilities annual payments be to retire the bonds? Hint - multiply the bond amount from B by an A/P factor. Nerd expects to run the power plant at an 87% capacity factor. –E - How much power will the plant generate every year? hint - multiply 1,000,000 kilowatts of capacity by 365 days per year multiplied by 24 hours per day - multiplied by 0.87.

HW Continued Nerd believes that the cost for running his nuke plant will be 0.3 cents per kilowatt hour. –F- What will Nerd project for his annual operating cost for his Nuke plant? Hint- take the number of kilowatt hours generated in E multiplied by Nerd believes his plant will run for 50 years and that it will sell power for 2 cents/kwh. –G- Draw the cash flow that Nerd will project from the viewpoint of “Take Your Wealth Edison” investors. hint - the cash flow will have an initial negative cash flow from investment. It will then have a 30 year annuity composed of the money from power sales minus the operating cost from F and minus the payments on the bonds. Then there will be 20 more years of the power sales minus the annual operating cost.

HW Continued H- Get the IRR for the cash flow in G. Things went wrong for the nuclear promise. Permits were slow and the plants cost a lot more to build than originally projected (in part because of safety upon safety added for permits and in part because inflation was out of control). Nerds plant, originally planned to cost $1,150/KW of capacity in fact actually cost $3,000/KW. Operating costs instead of being 0.3/KWH, were in fact 1 cent/KWH. What was the actual NPV of the investment at 12% interest.