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VOLT CO (MARCH 2019, ADAPTED)
Volt Co generates and sells electricity. It operates two types of power station: nuclear and
wind. The costs and output of the two types of power station are detailed below:
Nuclear station
A nuclear station can generate 9,000 gigawatts of electricity in each of its 40 years of useful
life. Operating costs are $486m per year. Operating costs include a provision for
depreciation of $175m per year to recover the $7,000m cost of building the power station.
Each nuclear station has an estimated decommissioning cost of $12,000m at the end of its
life. The decommissioning cost relates to the cost of safely disposing of spent nuclear fuel.
Wind station
A wind station can generate 1,750 gigawatts of electricity per year. It has a life cycle cost of
$55,000 per gigawatt and an average operating cost of $40,000 per gigawatt over its 20-
year life.4 If Volt Co sets a price to earn an operating margin of 40% over the life of a wind
station, what will be the total lifetime profit per station (to the nearest $m)?
A $35m
B $408m
C $560m
D $933mI need help with this question.Thank you
The operating profit margin is 40%, therefore the profit is 40% of the selling price and so the operating cost is 60% of the selling price.
Given that the average operating cost is $40,000 per gigawatt, the selling price must be 40,000/60% = $66,667 per gigawatt, and the operating profit must be 66,667 – 50,000 = $11,667 per gigawatt.
They generate 1,750 per year for 20 years, and therefore the total liftetime profit is 20 x 1,750 x $11,667.
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