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Triggering Nuclear Development

What construction cost might prompt orders for new nuclear power plants in Texas?
Fortnightly Magazine - May 2004
  1. quoted here) and added a new section, "Real Options and Decision Trees."
  2. Here g = 1/2 . {1+[1+(8.0.077/0.042)]1/2 } = 2.5 and f = (g - 1) /g = 0.60

  1. The capital recovery factor, d, is equal to [erT (er - 1)]/( erT - 1), where r is the generator's cost of capital and T is the economic life of the plant (ignoring tax effects, see next).
  2. Neglecting income taxes is not likely to influence the primary conclusions of this paper under competitive market conditions, low corporate income tax rates, and the use of accelerated depreciation. However, the error will increase with increases in the cost of capital.
  3. Consider Robert Brealey and Stewart Myers, Principles of Corporate Finance (2000, Irwin/McGraw-Hill); p. 275): "Finally, it is very difficult to interpret a distribution of NPVs. Since the risk-free rate is not the opportunity cost of capital, there is no economic rationale for the discounting process. Because the whole edifice is arbitrary, managers can only be told to stare at the distribution until inspiration dawns. No one can tell them how to decide or what to do if inspiration never dawns." Hopefully, this analysis will provide some inspiration for identifying sources of risk and how to mitigate them. It also provides a method for calculating the risk premium.
  4. Avinash Dixit and Robert Pindyck, Investment Under Uncertainty (1994, Princeton University Press): pp. 65 and 148.
  5. Here, f equals [( g - 1)/ g] where g = 1/2 ? {1 + [1 + (8 d / s 2 )]1/2}, see Rothwell (2004, Appendix. 2). This formula for g assumes that financial markets price risk consistently across assets, including assets in a portfolio that is perfectly correlated with ("spans") net revenues for new power plants.

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