Here is the answer.
Using Financial Calculator
First step, PV= -500, I= 5%, N= 20. Compute FV to get 1,326.6 the value Mega will need to decommission the plan 20years from now.
Second step, PV = -100, FV = 1,326.6, N = 20, I= 7%. Compute PMT to get 22.9, closest to 23, answer C, the amount necessary to have the customers pay each year.
Using Tables
First, use FV of $1, read across 20 and down 5% to find 2.6533. Multiply by 500 to get 1,326.65.
Step 2A, Use FV of $1, read across 20 and down 7% to find 3.8697. Multiple by 100 to get 386.97, what the 100 will grow to.
Step 2B, subtract 386.97 from 1,326.65 to get 939.68, the FV to be gotten from the customers.
Step 2C, use FV of annuity, read across 20 and down 7% to find 40.9955. Divide 939.68 by 40.9955 to get 22.92, same answer as above. -------------------------------------------
Neha
Oman
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Original Message:
Sent: 05-10-2014 06:01 AM
From: Neha Parakh
Subject: CMA Part 2 Doubt - Q Decommissioning costs
Hi, Can someone please help answer the below Q, by showing the workings.
1) Mega Power estimates that the cost to decommission its nuclear power plant in today's dollars is $500 million. This cost is expected to escalate at 5% per year over the life of the plant. Mega must collect a constant amount each year from customers over the remaining 20 year life of the plant and place the amounts in a fund which is expected to earn at a rate of 7% per year. The fund currently has a balance of $100 million. How much must Mega collect from customers each of the next 20 years to cover the decommissioning costs? Ignore income tax effects and round to millions.
a. $38 million.
b. $26 million.
c. $23 million.
d. $20 million.
Answer is: Option c. (Please explain why by showing the workings.)
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Neha
Oman
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