Power Plant Investment Decision
An electric utility company needs to build a new power plant to meet growing demand. They are considering two options, each with a projected operational lifespan of 40 years. Based on the information provided, which option represents the more sound long-term investment? Justify your recommendation by evaluating the financial implications of each choice over its entire operational life.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Power Plant Investment Decision
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- Option A (e.g., Solar): High initial investment to build, but near-zero ongoing fuel costs.
- Option B (e.g., Natural Gas): Low initial investment to build, but requires continuous and significant fuel purchases.
To make the most economically rational decision, which of the following should be the primary basis for the firm's choice?
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True or False: An energy company is choosing between two power plant designs, both with a 30-year operational life. Plant X has a very low upfront construction cost but relies on a fuel source with highly unpredictable and potentially rising prices. Plant Y has a much higher upfront construction cost but uses a free, readily available energy source. Based on sound economic principles for this sector, Plant X is the superior choice because its initial cost is lower.
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An energy firm is planning a new power station with an expected 40-year lifespan. Match each economic concept or technology type with its most accurate description in the context of this long-term investment decision.
An energy company is deciding between two technologies for a new power plant, each with an expected operational life of 30 years.
- Technology A: Requires a $100 million upfront investment for construction and has annual operating and fuel costs of $5 million.
- Technology B: Requires a $200 million upfront investment for construction and has annual operating and fuel costs of $1 million.
Based solely on the total costs incurred over the 30-year lifespan, which statement is correct?
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