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Exam question (Mar/Jun 2019 sample): 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.What is the life-cycle cost per gigawatt of the nuclear station (to the nearest $’000)?
The solution excluded the ‘cost of building’ – should this always be excluded? Also, the annual operating cost is ‘$486m’ so I calculated $486,000,000 * 40 years but the solution doesn’t seem to do it this way, can you please explain why?
The answer has taken 486m x 40 and has arrived at a total operating cost of 19,440m.
The cost of the building has not been excluded. The 486m is including 175m a year as depreciation of the building. (40 x 175m = 7,000m).
Hello John,
Another question for Wind Station.
Wind station :
A wind station can generate 1,750 gigawatts of electricity per year. It has a lifecycle cost of $55,000 per gigawatts and an average operating cost of $40,000 per gigawatts over its 20- years life.If volt Co set a price to earn operating margin of 40% over the life a wind station , what will be the total profit per station (to the nearest $m)?
Solution :
Selling price = $40,000/60 = $ 66667
Life profit per gigawatts = $11,667( $66667- $55,000 )
Total lifetime profit = $408m ( 1,750* 20yrs * $11,667.I’m terribly sorry to ask (it must be very easy) but I can’t get my head around as to why we divide $40,000 by 60%, would you mind explaining please?
Many thanks
NavindaIf the margin is 40%, then for every $100 revenue the profit must be $40 and therefore the cost must be $60
Therefore for every $60 cost, the revenue is $100.
Therefore the revenue is 100/60 times the cost.
It will help you to watch the Paper FA lectures on mark-ups and margins.
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