Acid Rain: The Southern Company (A)

Evaluation of Option 1

Burn High-Sulfur Coal without Scrubbers and Purchase Allowances.

Sulfur Dioxide Emitted = 266650 tons per year

Sulfur Dioxide Allowance received in 1st phase = 254580 tons per year

Sulfur Dioxide Allowance received in 2nd phase = 122198 tons per year

1st Phase include Years starting from 1995 – 1999

2nd phase include years starting from 2000

Total sulfur dioxide emitted in 1st phase = (266650 ×5) tons = 1333250 tons

Sulfur Dioxide Emission Allowance received in 1st phase = (254580 × 5) tons = 1272900 tons

Sulfur Dioxide Emission Allowance required to buy 1st phase = (1333250 – 1272900) tons =
60350 tons

Sulfur Dioxide Emission Allowance required to buy in the 1 st phase per year = (60350 ÷ 5) tons =
12070 tons

Total sulfur dioxide emitted in 2nd phase = 266650 tons

Sulfur Dioxide Emission Allowance received in 2nd phase = 122198 tons

Sulfur Dioxide Emission Allowance required to buy 2nd phase = (266650 – 122198) tons =
122198 tons

Sulfur Dioxide Emission allowance price starts at $250 per ton and increases 10% per year

Year 1995 = $250

Year 1996 = $250 + 10%of $250 = $275

Year 1997 = $275 + 10%of $275 = $303

Year 1998 = $303 + 10%of $303 = $333

Year 1999 = $333 + 10%of $333 = $366

Year 2000 = $366 + 10%of $366 = $403

Value of Sulfur Dioxide Emission Allowance required for buying

1st phase

Year 1995 = $250 × 12070 tons = $3017500

Year 1996 = $275 × 12070 tons = $3319250

Year 1997 = $303 × 12070 tons = $3657210

Year 1998 = $333 × 12070 tons = $4019310

Year 1999 = $366 × 12070 tons = $4417620

2nd phase

Year 2000 = $403 × 122198 tons = $49245794

Calculation of Net Present Value:

Year 1995 Amount in $

Total Revenue (21551000000kw × $0.056) = 1206856000

Less: Operating cost (21551000000kw × $0.00281) = 60558310

Less: Cost of buying Sulfur Dioxide Emission Allowance = 3017500

----------------------

= 1143280190

Less: Tax 37.7% = 431016632

----------------------

= 712263558

----------------------

NPV = PVIF (10%, 6th year) i.e. 0.5645 × 712263558 = $402072778

Year 1996 Amount in $

Total Revenue (21551000000kw × $0.056) = 1206856000

Less: Operating cost (21551000000kw × $0.00281) = 60558310

Less: Cost of buying Sulfur Dioxide Emission Allowance = 3319250

----------------------

= 1142978440

Less: Tax 37.7% = 430902872

----------------------

= 712075568

----------------------

NPV = PVIF (10%, 5th year) i.e. 0.6209 × 712075568 = $442127720

Year 1997 Amount in $

Total Revenue (21551000000kw × $0.056) = 1206856000

Less: Operating cost (21551000000kw × $0.00281) = 60558310

Less: Cost of buying Sulfur Dioxide Emission Allowance = 3657210

----------------------

= 1142640480

Less: Tax 37.7% = 430775461

----------------------

= 711865019

----------------------

NPV = PVIF (10%, 4th year) i.e. 0.683 × 711865019 = $486203808

Year 1998 Amount in $

Total Revenue (21551000000kw × $0.056) = 1206856000

Less: Operating cost (21551000000kw × $0.00281) = 60558310

Less: Cost of buying Sulfur Dioxide Emission Allowance = 4019310

----------------------

= 1142278380

Less: Tax 37.7% = 430638949

----------------------

= 711639431

----------------------

NPV = PVIF (10%, 3rd year) i.e. 0.7513 × 711639431 = $534654705

Year 1999 Amount in $

Total Revenue (21551000000kw × $0.056) = 1206856000

Less: Operating cost (21551000000kw × $0.00281) = 60558310

Less: Cost of buying Sulfur Dioxide Emission Allowance = 4417620

----------------------

= 1141880070

Less: Tax 37.7% = 430488786

----------------------

= 711391284

----------------------

NPV = PVIF (10%, 2nd year) i.e. 0.8264 × 711391284 = $587893757

Year 2000 Amount in $

Total Revenue (21551000000kw × $0.056) = 1206856000

Less: Operating cost (21551000000kw × $0.00281) = 60558310

Less: Cost of buying Sulfur Dioxide Emission Allowance = 49245794

----------------------

= 1097048896

Less: Tax 37.7% = 41358743

----------------------

= 683461462

----------------------

NPV = PVIF (10%, 1st year) i.e. 0.9091 × 683461462 = $621334815

Total NPV = $(402072778 + 442127720 + 486203808 + 534654705 + 587893757 + 621334815)

= $3074287583

Evaluation of Option 2

Burn High-Sulfur Coal with Scrubbers

Revenue per kw = $(0.056 - 2% of 0.056) = $0.05488

Total revenue = $(0.05488 × 21551000000) = $1182718880

Operating cost = $(0.00281 +0.13% of 0.00281) = $0.002813653

Total operating cost = $0.002813653 × 21551000000 = $60637036

Total value of installation of Scrubbers:

1992 = $143850000

1992 = $503610000

1993 = $71970000
---------------------------

= $719430000

Value of depreciation = 14% of $719430000 × 14% = $100720200

Calculation of net present value: Amount in $

Revenue = 1182718880

Less: Operating cost = 60637036

Less: Depreciation = 100720200

-------------------

= 1021361644

Less: Tax (37.7 %) = 385053340

-------------------

= 636308304

Add: Depreciation = 100720200

-------------------

= 737028504

-------------------

NPV = PVIFA (10%, 6th year) i.e. 4.3553 × 737028504 = 3209980243

Less: Initial outlay = 719430000

-------------------

Total NPV =$ 2490550243

-------------------

Evaluation of Option 3

Burn Low-Sulfur Coal

In the situation of burning low sulfur coal, there are mainly two additional cost associated with
this. These are,

1) The additional cost of Low sulfur which is more as compared to High sulfur.
2) The requirement of changes in the electrostatic precipitators (controls fly ash).The cost
associated with this is $22.1 million.

But the cost of low sulfur is not mentioned in any of references given in the case. So it
will not possible to calculate the NPV of the 3rd option.

Recommendation: - From all the above analysis it has been found that, if

 NPV of option 1 will be $3074287583.

 NPV of option 2 will be $2490550243.

As $3074287583> $2490550243,

Therefore we will choose option 1. But in case of 2nd option the amount of Sulfur dioxide
emitted after the installation of the scrubbers by the company is not given. So the gain from the
sale of excess allowances in the market is not taken into consideration. If the sale value is
obtained than the scenario might be different.

The value of third alternative cannot be found out as the related cost is not mentioned in the
question.

Qualitative analysis: - According to the qualitative study, alternative 2 and alternative 3 will be
more fruitful for the environment and society. This is because though the cost associated with
these two alternatives will be high but these alternatives will help in controlling the pollution
and thus it will help the society.