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Answers To The Given Case's Questions

This document contains answers to 5 questions regarding a case study on Hydro, an aluminum company, investing in wind power. 1) Hydro should not invest in the Utsira wind power project given the risks and uncertainties around achieving a high conversion factor needed to earn a profit. 2) A larger 1 megawatt turbine that costs $4.1 million to install would require a conversion factor of 57% to recover costs over 15 years. 3) If Hydro funds a negative NPV wind project anyway, they have an ethical obligation to their shareholders to find a way to achieve a positive NPV or justify how it creates value. Corporate social responsibility and policies around coal emissions were discussed. 4

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Azatbek Ashirov
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516 views1 page

Answers To The Given Case's Questions

This document contains answers to 5 questions regarding a case study on Hydro, an aluminum company, investing in wind power. 1) Hydro should not invest in the Utsira wind power project given the risks and uncertainties around achieving a high conversion factor needed to earn a profit. 2) A larger 1 megawatt turbine that costs $4.1 million to install would require a conversion factor of 57% to recover costs over 15 years. 3) If Hydro funds a negative NPV wind project anyway, they have an ethical obligation to their shareholders to find a way to achieve a positive NPV or justify how it creates value. Corporate social responsibility and policies around coal emissions were discussed. 4

Uploaded by

Azatbek Ashirov
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Answers to the given case’s questions.

1)As a value-maximizing aluminum company, should Hydro invest in wind power in light of the Utsira pilot
project? Why or why not?

Well, let’s thing by the given information in the case, we know that our investment with all
equipment with 3 extra pieces, will cost $2.7 mln. And our investment will be profitable if CF (conversion
factor) will be 70% (as in Norway) we will gain $3.1 mln, but this the highest rate in the whole world. Even if
CF would be 60%, we don’t gain profit ((60*3.1)/70= 2,657<2.7 invested)

It is very risk-bearing investment I think.

2. Larger-scale turbines increase the electricity more than proportionately to the increase in costs. A 1
megawatt turbine costs $2.6 million, with the remaining equipment costs unchanged, for a total required
investment of $4.1 million to power approximately 760 households. Electricity revenue over 15 years rises
to$7.2 million in discounted present value. What conversion factor allows cost recovery of this larger-scale
turbine?

Our conversion factor(CF) will be 57% ( 4.1/7.2) .

3. If the net present value of the Utsira project is negative, yet Hydro goes ahead and funds the investment
anyway, what ethical obligations does Hydro have to its shareholders? Discuss the role of corporate social
responsibility and of back-up plans to address the possible full costing of coal, as in the European Union
where carbon permits for a ton of coal have at times increased coal resource costs by 25 percent

Hydro should not do that, but if the did. They are responsible for that, and Hydro should find the
way, which will deliver them to a positive NPV.

25% it is okay. Because burning coal is so harmful for nature. To abate the pollution there is a cap
and trade system exists also.

4. On what basis could shareholder value possibly rise if Hydro invests in negative NPV wind power
projects?

To increase reputation of the firm. Because investing in another renewable energy project will be good on
firm’s reputation and stock’s projection will increase. As a result, stock prices will increase.

5. Electric power generation is responsible for 43 percent of all energy consumption in the United States.
Coal provides the preponderant fuel (38 percent), with nuclear power (19 percent) and natural gas (30
percent) providing most of the rest. Renewable energy provides only 12 percent. Recently, T. Boone Pickens
proposed converting the trucking fleet in the United States to liquefied natural gas (LNG) and using wind
power to replace the missing LNG in electric power production. What infrastructure issues do you see that
must be resolved before the Pickens plan could be adopted?

First of all, change oil stations to “energy” stations. Second, invest in Utsira project.

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