Should the company install the scrubber

Assignment Help Macroeconomics
Reference no: EM13178955

An electric company must decide whether to install a scrubber to reduce sulfur dioxide emissions from its electric generating station. The plant currently has no such pollution control equipment, and must buy SO2 permits to cover its emissions at an annual cost of $500,000. The cost of installing the scrubber is $10 million; when installed, the need for buying 3 pollution permits will be eliminated. For every year that the company does not install the scrubber, it will have to purchase permits, and the demand for electricity-and therefore SO2 permits-is projected to grow at an annual rate of 5%. Assume that the plant managers base their decisions on a five-year capital budgeting cycle (i.e., time is t = 0, 1, 2, ..., 5, where t = 0 is now), and that changes in regulations mean that the company has to buy the scrubber within a 5-year grade period (i.e., by t = 5). Scrubbers are huge pieces of capital equipment that require time to build and bring on line, so if the scrubber is installed in year t, permits must be purchased for that year as well.

(a) If the company can get a 6 percent return on alternative investments, should the company install the scrubber now, or, if not, how long should it wait?

(b) What would the annual rate of return have to be for immediate installation of the scrubber to be cost-effective?

(c) Let P and S denote the (constant) costs of permits and the scrubber, and let the discount rate be r and the growth rate of the demand for permits be 0 < g < r. Assuming continuous time, set up the firm's problem and solve analytically for the optimal time t = T when the company would want to invest. Explain the impact of the parameters on your solution.

Reference no: EM13178955

How will looming fears of a recession impact the quantity

If Starbucks's marketing department estimates the income elasticity of demand for its coffee to be 1.75, how will looming fears of a recession (expected to decrease consumer

Why the cost curves of the firms are unchanged

If we assume that all firms in a perfectly competitive constant cost industry are identical, we conclude that, in the long run, product price will exactly equal the firms' m

Compute budget constraint

What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and P x = $5, P y = $10, X = 20, and M = 500?

Explain the long-run aggregate supply curve

A decrease in government spending will cause a(n) increase in the quantity of real domestic output demanded. decrease in the quantity of real domestic output demanded. decr

What do economists mean

In the USA, it is the opposite: No harvesting is allowed unless the deceased had signed, while still alive, an organ donor form authorizing doctors to harvest any needed org

Price elasticity of demand for business travelers

An airline estimates that the price elasticity of demand for business travelers (who travel on weekdays) is -2, while the price elasticity of demand for vacation travelers (

Especially illustrate cycles or approaches toward us economy

Especially illustrate the cycles or approaches toward the U.S. economy: going from one extreme to another depending upon the mood of the nation and the presidential administ

Compute company total assets turnover

Donaldson + son has an ROA of 10 percent, a 2 percent profit margin, and a return on equity equal to 15%. What is the company's total assets turnover?


Write a Review

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd