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Given the new found interest in nuclear power plants due to potential carbon taxes, you consider starting a company to build a nuclear power plant.
Given the new found interest in nuclear power plants due to potential carbon taxes, you consider starting a company to build a nuclear power plant. Before you can build the plant, you need to gather permits, fight lawsuits and so forth. That will cost $800 million today and take 5 years to resolve with a 35% probability of success. If you build the plant, you must pay $9 billion the day you start building the plant, which is immediately after the lawsuits etc are resolved. The power plant itself takes 4 years to build. At that point the plant starts operating (exactly 4 years from when construction started). You receive $1 billion per year for 50 years starting one year from when the plant starts operating. At the end of the project, you have to pay $3 billion to shut down the plant. Your discount rate is 6% (annual rate, annual compounding).
Assume that you made the $800 million investment and the 5 years of permits, lawsuits and so forth have passed. The $800 million investment was successful. Now you are debating if you should make the plant or not today. What is the NPV of the plant?
