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Question 3a

Maxwell Electricity Generation (Maxwell) is an electricity-generating firm producing power for industry and the general public in the country of Deeland. In the past, the company has been dominated by the need to make suitable returns on capital for its shareholders.

All power stations work in broadly the same way by taking in fuel (coal, gas or nuclear) and producing electricity and waste products.

Maxwell has the following mix of power stations:

Details for each type of station Totals for Maxwell
Power station type Maximum generating power (MW) Operating cost of electricity ($/MWh)  Capital cost ($m) Number of stations Total capital invested ($m) Total CO2 emissions (million tonnes)
Coal (small) 300 25 1,320 4 5,280 3·15
(large) 600 25 2,640 4 10,560 12·61
Gas (small) 300 50 300 8 2,400 3·15
(large) 900 50 900 2 1,800 7·10
Nuclear 1,200 20 6,000 2 12,000 0·50

32,040

26·51 

Notes:
1. Maximum generating power is the output of the station measured in megawatts (MW) at 100% operating capacity. The electricity produced by a station is measured in megawatt hours (MWh).
2. It is assumed that the same load factor applies across all the different types of station, i.e. they are working at the same percentage of capacity throughout the year.
3. Operating cost of electricity is the cost before the cost of financing the capital invested in a station.
4. The CO2 (carbon dioxide) emissions are estimated based on industry standard figures for similar stations.
5. Capital costs and CO2 emission figures are current best estimates.
The business has two alternative plans (plans 1a and 1b) to maintain current generating capacity while plan 2 will grow the business.

Plan 1a
Build a new nuclear power station (the same as the existing nuclear type) to replace one of the 300 MW coal stations, one of the 600 MW coal stations and, also, one of the 300 MW gas stations. The stations being replaced are all reaching the end of their useful lives.

Plan 1b
Replace the gas and coal stations mentioned in plan 1a with equivalent gas and coal stations, thus maintaining the current generating mix.

Plan 2
In order to grow the business, a new nuclear station is being considered in combination with one of plan 1a or 1b. This new nuclear station would be the same as the existing stations.

Maxwell is trying to raise finance for either plan 1a or plan 1b and, in addition to one of these plans, plan 2. A nuclear plant takes about five years to build (assuming no regulatory difficulties or problems over the design choice). It has a working life of 40 years and costs about $1bn at current prices to decommission although this estimate is uncertain as each site is unique in the decommissioning difficulties which it presents.

The government of Deeland has joined the international community in pledging to have greater concern for the environment. Initially, it has stated that there is a national goal to reduce carbon dioxide emissions by 20% in the next five years. The government is aware that electricity demand is estimated to rise by around 10% over the next five years, nevertheless, it is strongly encouraging businesses to help achieve this reduction in CO2 emissions. There is a proposal to raise a carbon tax on CO2 emissions in order to encourage reductions. The government is also concerned that there are other pollutants emitted by power stations but has decided to focus efforts on CO2 initially, as it is a key cause of climate change.

In order to join the wider community in achieving these aims and as one of the major electricity generators in Deeland, Maxwell has stated its own environmental goal as:
‘to help reach national targets for reduction in CO2 emissions while maintaining our ability to contribute to the electricity needs of the people of Deeland.’

The finance director is interested in broadening environmental reporting within the company and has asked you as his performance measurement expert to explain how input/output analysis would help. He needs to know how this will broaden performance measurement at Maxwell. Lastly, he wants to understand the impact of this analysis on the management information systems which are currently set up for periodic financial reporting purposes.

Required:

(a) Using Maxwell’s stated environmental goal, assess the proposed investment plans 1a and 2. (10 marks)