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Overview of Big Crick River Site
The proposed Big Crick River site is located .23 miles due west of the intersection of Bronco Road and Route 180 in the southwest corner of Johnson County. The Big Crick River is a strong-flowing, medium-sized river that is approximately a quarter-mile wide at the proposed project site. At this location, the river level drops by approximately 55 meters.

Summary of Proposed Investment
The proposed facility at the Big Crick River site consists of a small hydroelectric facility with two turbines (one primary and one backup) and two accompanying generators.

Because of the relatively small vertical drop of the river, a "low-head" hydroelectric plant would be most logical at this location. This means that the facility will not require a dam but will be constructed to make use of the run of the river. As a consequence, the facility will be unable to "store" water during high flow seasons; rather, its energy production will vary directly with the seasonal flows of the river. Fortunately, studies of the river at this location indicate a steady rate of flow, even through the dry summer months.

Electricity Production Determination
The amount of electricity that can be generated at a hydroelectric plant is dependent on two factors: (1) the "head," or vertical distance (measured in meters) through which the water falls, and (2) the flow rate, measured in cubic meters per second. The electricity produced is proportional to the product of the head and the rate of flow.

The amount of electricity that can be generated by a hydroelectric facility can be roughly estimated using the following equation:

Power = 5.9 × Flow × Head

The potential power output of the Big Crick River site was calculated (using the equation shown above) based on the technical specifications for the site.

Estimated Profit Potential
Calculations using the current price of electricity and the power calculations for the site indicate that year-end revenues from the Big Crick River facility (with one turbine on line) will total $190 million in year 1.

Preliminary negotiations have begun with the Steerville utilities committee regarding the possible purchase of electricity from the proposed Big Crick River facility. The Steerville committee is interested in purchasing the plant's entire energy production in year 1 in order to supplement its current supply. In addition, there are indications that the town's electricity needs will be growing each year in the foreseeable future (see the newspaper article on Steersville's energy needs); again, the committee has indicated that it would like to meet this increased demand through a purchase from the Big Crick River facility. Calculations based on projections of future usage provided by the Steersville utilities committee indicate that profits from this facility will increase at a rate of 5 percent per year. The additional energy supply would be provided by bringing the second turbine online as needed.

Construction and Maintenance Expenses
Total cost for the construction of the facility, purchase and installation of turbines and generators, and running of necessary external supply cables is estimated at $75 million. This expense is a one-time, up-front cost. The cost of bringing the second turbine on line is negligible. Annual operating expenses are projected to total $180 million in year 1, resulting in a profit of $10 million for that year.

Solution Preview

Please see the attached file.

NPV = PV of inflows - initial investment.

Here the initial investment is $75 ...

Solution Summary

The solution explains the calculation of NPV for various projects.