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Question
Mid-State Electric Company must clean up the water released from its generating plant. The company's required rate of return is 10 percent for average projects, and that rate is normally adjusted up or down by 2 percentage points for high- and low-risk projects. Clean up Plan A, which is of average risk, has an initial cost of u2212$1,000 at time 0, and its operating cost will be u2212$100 per year for its 10-year life. Plan B, which is a high-risk project, has an initial cost of u2212$300, and its annual operating cost over Years 1 to 10 will be u2212$200. What is the proper PV of costs for the better project?
a. u2212$1,430.04
b. u2212$1,525.88
c. u2212$1,614.46
d. u2212$1,642.02
e. u2212$1,728.19
Answer
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