Calculate Minimum Energy for 10% ROI and Investment Approval
Overview
This question evaluates financial modeling and unit-economics competencies, including ROI calculation, cost-volume-profit reasoning, and capacity feasibility for a renewable energy project.
Renewable Plant ROI and Capacity Feasibility
Context
You are evaluating whether a proposed renewable energy plant can achieve a 10% annual ROI, given its costs, prices, and capacity. Assume ROI is based on annual operating profit before taxes and depreciation.
Given
- Selling price: $40 per kWh
- Variable cost: $20 per kWh
- Fixed operating cost: $25 million per year
- Land lease: 60 million per year)
- Maximum annual capacity: 8.8 million kWh per year
- Initial investment (capex): $400 million
- Target ROI: 10% per year on the initial investment
(Note: The mention of “avg output 1,000 kWh” is inconsistent in units for a rate; use the stated annual capacity of 8.8 million kWh/year for feasibility.)
Questions
(a) What is the minimum annual energy (kWh) the plant must generate and sell to achieve a 10% annual ROI?
(b) Based on that quantity relative to the 8.8 million kWh/year capacity, would you approve the investment? Explain briefly.
Hint
ROI = annual profit ÷ initial investment. Annual profit = (price − variable cost) × Q − (fixed cost + annual lease). Solve for Q and compare with capacity.
Solution
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